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NAME: KOJO ABOAGYE-DEBRAH
PROGRAMME: DOCTOR OF PHILOSOPHY
“COMPETITION, GROWTH AND PERFORMANCE IN THE
BANKING INDUSTRY IN GHANA.”
A Dissertation Submitted in partial fulfillment of the Requirements for
the Award of the Doctor of Philosophy (Strategic Management) of the
St Clements University
August 2007
Matriculation Number: 8054
2
Table of Content
Table of Content .................................................................................................... 2 CHAPTER ONE .................................................................................................... 4 1.0 INTRODUCTION............................................................................................ 4
1.1 Background Information............................................................................... 4 1.2 Problem Statement ....................................................................................... 6 1.3 Objectives of the study ................................................................................. 6 1.4 Hypothesis Testing ....................................................................................... 7 1.5 Justification of the research. ......................................................................... 7 1.6 Methodology ................................................................................................ 8
1.6.1 Testing Levels of Competition in the Ghanaian Banking Industry.......... 9 1.6.1 Non-Structural approach-Panzar and Ross ........................................... 12 1.6.2 Concentration and Performance ........................................................... 13 1.6.4 Bank Size and Performance ................................................................. 13 1.6.5 CAMEL Framework............................................................................ 15 1.6.6 Framework for SWOT Analysis........................................................... 16
1.7 Organisation of work.................................................................................. 17 CHAPTER TWO ................................................................................................. 19
2.0 LITERATURE REVIEW ........................................................................... 19 2.1 Theoretical Review..................................................................................... 19 2.2 Empirical Literature: - Determinants of Bank Profitability.......................... 24 2.3 Summary of Overview of literature -Measuring Competition in the Banking Industry............................................................................................................ 30
2.3.1 Structural Approaches – SCP Paradigm ............................................... 30 2.3.2 Non – Structural Approaches ............................................................... 32
2.4 The Panzar-Rosse approach........................................................................ 36 2.4.1 H-statistic ............................................................................................ 36
CHAPTER THREE.............................................................................................. 39 OVERVIEW OF BANKING INDUSTRY........................................................... 39
3.0 Introduction................................................................................................ 39 3.1 Post Independence Financial Sector Policies............................................... 41
3.1.1 Establishment of public sector banks.................................................... 42 3.1.2 Interest Rate Policy.............................................................................. 45 3.1.3 Credit Controls .................................................................................... 46 3.1.4 Demonetization Exercises and Anti Fraud Measures ............................ 46 3.1.5 Prudential Regulation and Supervision................................................. 47
3.2 Impact of Pre-Reform Policies on Banking Markets ................................... 48 3.2.1 Financial Depth ................................................................................... 48 3.2.2 Lending to Priority Sectors .................................................................. 50 3.2.3 Financial Distress among Public Sector Banks..................................... 51 3.2.4 Foreign Banks...................................................................................... 56
3.3 Financial Sector Adjustment Programme (FINSAP) ................................... 57 3.3.1 Restructuring the Public Sector Banks ................................................. 58 3.3.2 Reforms to the Prudential System ........................................................ 62 3.3.3 Financial Liberalisation ....................................................................... 68
3.4 The Impact of Reforms on Financial Sector Performance ........................... 74 3.4.1 Financial Deepening ............................................................................ 75 3.4.2 Macroeconomic Management .............................................................. 81
3
3.4.3 Interest Rates and Spreads ................................................................... 82 3.4.4 Restructuring of Banks and Banks Distress .......................................... 84 3.4.5 Money and Capital Markets Development ........................................... 85
3.5 Environment, Competition and Performance .............................................. 87 3.5.1 Competitive Environment .................................................................... 87 3.5.2 Summary of Industry Characteristics ................................................... 96 3.5.3 Key Strategic Opportunities from environment .................................... 97
3.6 Structure of the Banking Sector-2005 ......................................................... 98 3.6.1 Concentration .................................................................................... 101 3.6.2 The Retail Market .............................................................................. 103 3.6.3 Banking Services Delivery and Products............................................ 104 3.6.4 Performance of the Banking Sector.................................................... 105 3.6.5 Possible Factors Explaining Bank Profitability and efficiency of Intermediation ............................................................................................ 108
6.6 Key Performance Indicators ..................................................................... 111 3.7 Competition (Competitive Strength of Banks) .......................................... 114
3.7.1 Market Share of Deposits................................................................... 114 3.7.2 Comparative Trend Analysis of Market Share of Deposits (2000-2004)................................................................................................................... 115 3.7.3 Cost of Funds..................................................................................... 116 3.7.4 Return on Equity (ROE) .................................................................... 117 3.7.5 Return on Assets (ROA) .................................................................... 118 3.7.6 Quality of Loan Assets....................................................................... 119 3.7.7 Cost Efficiency .................................................................................. 120 3.7.8 Non-Interest Income .......................................................................... 121
3.8 SWOT Analysis........................................................................................ 122 3.8.1 Strategic Issues emanating from the SWOT and Environmental Analysis................................................................................................................... 125
3.9 Summary.................................................................................................. 126 CHAPTER FOUR.............................................................................................. 128 MODEL SPECIFICATION, ANALYSIS AND DISCUSSIONS ....................... 128
4.0 Methodology ............................................................................................ 128 4.1 Testing Levels of Competition in the Ghanaian Banking Industry............. 128
4.1.1 Herfindahl- Hirschman Indexes from 1989-2005 (HHI) ..................... 130 4.1.2 Market Concentration ........................................................................ 142
4.2 Panzar and Rosse’s H-Statistics ................................................................ 148 4.3 Concentration and Performance ................................................................ 151 4.4 Bank Size and Performance ...................................................................... 151
4.4.1 Regression Analysis........................................................................... 151 4.4. 2 Data...................................................................................................... 152
4.4.3 Results and Analysis of Regression.................................................... 155 4.5 CAMEL Framework................................................................................. 158
4.5.1 Capital Adequacy Ratio (CAR).......................................................... 158 4.5.2 Asset Quality ..................................................................................... 161 4.5.3 Profitability........................................................................................ 165 4.5.4 Cost Efficiency .................................................................................. 169
CHAPTER FIVE ............................................................................................... 171 5.0 FINDINGS, CONCLUSIONS AND RECOMMENDATION....................... 171
5.1 FINDINGS............................................................................................... 171 5.2 Conclusion ............................................................................................... 173 5.3 Policy Recommendation........................................................................... 173
REFERENCES .................................................................................................. 176
4
Appendices ........................................................................................................ 185
CHAPTER ONE
1.0 INTRODUCTION
1.1 Background Information
The economy of Ghana witnessed a decline in the late 1970s and the early part of
1980s. The negative performance of the economy significantly affected the banking
sector. The banking sector became less competitive; most banks were financially
weak, unprofitable, and illiquid and technologically bankrupt (Anim 2000).
The Government of Ghana launched the Economic Recovery Programme (ERP) in
April 1983 with the aim of liberalizing the economy from controls in order to
enhance productivity. The economy witnessed some stabilisation between 1984-
1986. It was however, felt that for the programme to achieve the desired results
there should be a dynamic financial sector to facilitate the payment system and
enhance the allocation of resources. Financial Sector Adjustment Programme
(FINSAP) was embarked upon in 1988 to address the weaknesses in the banking
industry: low competition, weak financials, low profitability as a result of high non-
performing loan assets, less liquidity, low capital base, and low level of technology
(Anim 2000).
Banks in Ghana have therefore undergone restructuring during 1988-92. There have
been some improvements in the restructuring. Profitability has soared in recent
years with return on equity (ROE) between 16% and 24%, averaging 20% over the
last 16 years. Capital adequacy ratios have seen improvement outpaced the
5
statutory requirement of 10%. In real terms, bad debts have been falling, and the
problem of non-performing assets seems to have been tackled.
It could however be argued that all is not well with the banking industry. The high
profitability could be said to owe less to efficiency and competitiveness than to the
structure of the industry that enables most banks to reap supernormal profits
(Ziorklui and Gockel, 2000). Also, a carefully review of the balance sheets of banks
in Ghana suggests that the banks in Ghana have generated extra returns by taking
greater risks.
Another dimension is whether or not size matter for performance of banks.
Evidence in Ghana seems to suggest that small/medium banks like The Trust Bank
and Ecobank are more profitable than big banks like Ghana Commercial bank (the
largest bank in Ghana) and Agricultural Development Bank (ADB). In the real
world size is a hot issue but according to Gibrat’s law size does not matter (Gibrat,
1931). Alhadeff and Alhadeff (1964) also found the top 200 banks in the US grew
more slowly than the total did. Rhoades and Yeats (1974) replicated this study for
the period 1960-71 and they too found that the largest banks grew less than the
system as a whole. Schotens (2000) also found bank profits are inversely related to
the amount of bank assets and positively related with the amount of tier-one bank
capital.
Therefore after sixteen years of implementation of financial reforms, what is the
scorecard particularly on banks in Ghana?
6
1.2 Problem Statement
FINSAP has been implemented over the last 16 years. The questions we will like to
ask are:
1. Is the banking sector in Ghana becoming more Competitive, efficient and
profitable?
2. Are competitive markets more efficient?
3. Are competitive banks more profitable?
4. Does size matter for profitability? and
5. What are the strategic implications for individual banks and the banking
industry in general?
1.3 Objectives of the study
The general objective of the study is to analyse competition, growth and
performance in the banking industry in Ghana. The specific objectives of the study
include:
To analyse the relationship between market structure and the performance
of the banking industry in Ghana;
To test whether size matters for individual banks’ profit performance;
To analyse the relationship between competition, efficiency and
profitability; and
To provide strategic lessons for individual banks and banking industry as a
whole.
7
1.4 Hypothesis Testing
The study tested the following hypothesis:
H1: The profit growth of banks is not related to their size
H2: The profit growth of banks is related to their size
The hypothesis is be tested at 5% level of significance (95% confidence level)
1.5 Justification of the research.
The functions of the banking system including providing payments and settlements
systems, mechanism for borrowing and lending, and pooling and allocation of
funds, among others impinge on all aspects of the economy and are central to the
overall performance of the economy. The efficacy of the financial systems in
performing these functions is a major ingredient of the efficacy of the economy as a
whole. Given the pivotal role of banking in an economy, the role of competition in
this industry is particularly important.
Survival in today competitive environment depends on performance and growth.
Competition has implications for efficiency, innovation, pricing, and availability of
choice, consumer welfare, and the allocation of resources in the economy. If
competition is weak, these advantages may be lost and there is likely to be a
transfer of welfare from consumers to both the producers of goods and services and
the shareholders of these firms.
Though there have been several studies on the impact of financial sector reforms
(FINSAP) on banks in Ghana, none of them address the issue of competition,
growth and performance. This study notes the absence of empirical inquiry into the
8
effects of competition, growth and performance in the banking industry in Ghana.
The concentration of banks deposits in a few commercial banks (Ghana
Commercial Bank, Barclays Bank, Standard Chartered Bank and Ecobank accounts
for over 60% of industry deposits) has policy implications for the direction of the
banking sector. Evidence of a positive relationship between market structure and
profitability in the Ghanaian baking industry will direct policy makers at changing
market structures to increase competition. This study therefore will be a pioneering
work on the effect of FINSAP on competition, growth and performance in the
banking industry in Ghana.
The major limitation of the study is the inability to include the pre-FINSAP period
due scarcity of data.
1.6 Methodology
The general objective of the study is to analyse competition, growth and
performance in the banking industry in Ghana. The specific objectives of the study
are: to find out the level of competition in the banking industry in Ghana, to analyse
how concentration in the banking industry is related to bank profitability, to
analyse how bank size affects the profits of banks in Ghana.
Based on these objectives, we hypothesize as follows:
H1: The profit growth of banks is not related to the size
H2: The profit of banks is related to their size.
To achieve the above objectives we made use of the following methods:
9
1.6.1 Testing Levels of Competition in the Ghanaian Banking Industry
According to Porter’s 5 Forces Model, the level of competition in an industry is
determined by the interaction of five main forces: existing competitive rivalry
between suppliers, supplier power, customer power, entry barriers, and threat from
substitute products. Porter’s 5 forces framework is depicted in Fig 1 below.
Fig 1: Porter’s 5 Forces Model
The banking industry in Ghana has undergone a lot of transformation over the past
two decades due to policies implemented under the financial sector reforms. The
number of banks has increased due to easy entry and exit. This has resulted in the
diminishing of supplier power while customer power has increased due to
increasing customer sophistication and knowledge as well as more banks available
to customers to decide which bank to do business with. The industry has also
witnessed increasing innovation and the threat from substitute products is eminent.
Entry Barriers
Competition in
the industry Supplier Power Customer Power
Threat from
substitute
10
Thus according to Porter’s 5 forces model, one would expect competition in the
industry to heighten.
1.6.1.1 K-Concentration Ratio
K-Concentration ratio is the percentage of the total market share of the four (4)
largest banks i.e. the proportion of market share accounted for by top k number of
banks. For example in 2005 the total market share of four largest banks in Ghana-
Ghana Commercial Bank, Barclays Bank Ghana, Standard Chartered Bank and
Ecobank Ghana constituted 56.2%. This means that the four largest banks
mobilised 56% of the total industry deposits. Theoretically, industries in which the
concentration ratio is under 50% are considered effectively competitive. Industries
in which the concentration ratio is at least 50% but less than 70% as the case of
Ghana, the industry is considered as weak oligopolies (the other seventeen banks
still command 43.8% and a situation where the ratio is more than 70% are
considered as strong oligopolies. Stronger means that the banks in the industry have
a greater ability to influence the price.
The second issue after the incidence of competition is to ascertain the intensity of
competition. Competition often intensifies with the entry of new entrants or
suppliers into a market that is not expanding proportionately. The market
concentration shows how competitive an industry is. If a market is very competitive
we expect the concentration ratio to be low as participants strive to acquire a
sizeable share of the market thus leading to efficiency.
11
1.6.1.2 Herfindahl- Hirschman Indexes from 1989-2005 (HHI)
Competition arises where two or more providers of services/goods offer their
products, as substitutes, to buyers in the same market (Korsah et al, 2001).
According to them, competition can be researched from various angles. First it is
important to establish the incidence of competition i.e. is there competition in the
banking industry in Ghana? A market with several suppliers makes collusion (anti-
competitive behaviour) difficult to enforce (Korsah et al, 2001). To them (quoting
Oster, 1995), where firms are similar in size, competition increases because none of
them can dictate the market. Therefore Herfindahl-Hirschman Index (HHI) is a
concentration measure that can be used as a tool for assessing the incidence of
competition. The Herfindahl-Hirschman Index (HHI) is calculated as the sum of the
squared market shares of all banks in the sector. That is
k HHI=ΣkMSi
2, 1=i Where, MSi is the bank’s market share and k represents the number of banks in the
banking industry.
In the case of a monopoly, when one firm has 100 percent of the market share, the
HHI will be equal to 10,000, which is the upper bound. The lower bound of zero is
attained when the market is perfectly competitive. Therefore, the larger the HHI,
the more concentrated the market becomes, since fewer firms control more of the
market. A market with HHI in excess of 1800 is generally considered as highly
concentrated and adverse effects can be presumed. However, the relationship
between concentration and market structure has been an area of considerable debate
among the structuralists. The discourse is centred on two competing hypothesis: the
12
“structure-conduct performance” (SCP) hypothesis and the “contestability”
hypothesis.
1.6.1 Non-Structural approach-Panzar and Ross
The study will employ the model developed by Panzar and Ross (PR) (1982 and
1987). Their model uses individual bank data to estimate a reduced-form revenue
equation. The nature of competition in the banking sector is evaluated using the H-
statistic-the sum of the factor price elasticities from the estimation.
The H-statistic can be used to identify the three major market structures, namely,
monopoly/perfect collusion, monopolistic competition and perfect
competition/contestable market. Conclusions about the type of market structure are
made based on the size and sign of the H-statistic. The intuition behind the H-
statistic rests solely on microeconomic theory, which outlines how revenues react to
changes in input prices for the different market structures. Basically, an increase in
costs will reduce revenues for a firm enjoying monopoly power, but increase that of
a firm in a perfectly competitive market, proportionately. Therefore, it is expected
that a perfectly competitive market will have an H-statistic equal to one, while the
monopolist will have a negative H-statistic. The monopolistically competitive
market should have an H-statistic that lies between zero and one. A summary of the
testable hypotheses of the different market structures is presented below:
H-statistic Hypotheses
H = 1 Perfect competition or in a contestable market
0<H<1 Monopolistic competition
H≤0 Monopoly or collusion
13
1.6.2 Concentration and Performance
To test the relationship between concentration and performance, we will use
Spearman’s Rank Correlation Matrix. For the performance measure we will use
return on equity (ROE) and return on assets (ROA). The 5-bank deposit market
concentration will be used as the concentration measure.
1.6.4 Bank Size and Performance
1.6.4.1 Regression Analysis
Alhadeff and Alhadeff (1964) compared the growth of the top 200 banks in the US
over the period 1930-60 to the growth of total bank assets. They found that the top
200 banks grew more slowly than the total did. Within the top 200, the bottom
segment grew more rapidly than the top, but showed greater variance in growth
rates. Rhoades and Yeats (1984) replicated this study for the period 1960-71. They
too found that the largest banks grew less than the system as a whole. This points to
de-concentration in banking. Scholtens (2000) also confirms that profit growth is
inversely related to size when bank size is measured by assets. Scholtens (2000)
findings saw profit growth positively correlated with equity. His findings indicated
the utmost importance of bank soundness, rather than asset size, for sustainable
bank performance.
In this research work the study will follow the same hypothesis of Scholtens (2000)
for the banking industry in Ghana as we want to find out whether profit
(performance of banks in Ghana) is related to bank size. Our hypothesis therefore
will be:
H1: The profit growth of banks is not related to the size
H2: The profit of banks is related to their size.
14
1.6.4.2 Data
The data cover the period from 1988 to 2005. The main data sources are the annual
reports and accounts for the financial institutions particularly the 21 major banks in
Ghana. The financial sector reforms in Ghana started in 1998. This is why we
decided to use the period 1988 to 2005. The pre reforms period data is scarcely
available. These financial institutions are Ghana commercial Bank, Barclays Bank
of Ghana, Standard Chartered Bank Ghana, Merchant Bank Ghana, Ecobank
Ghana, Agricultural Development Bank, National Investment Bank, SG-SSB Bank,
CAL Bank, The Trust Bank, Amalgamated Bank, Prudential Bank, Stanbic Bank
Ghana, Unibank Limited, First Atlantic Merchant Bank, Home Finance Company
Bank, Standard Trust Bank Ghana, International Commercial Bank and
Metropolitan and Allied Bank.
With respect to the characteristics that might affect profit growth (GPAT) with a
bank, we investigate bank assets and bank capital (equity or shareholders fund
which indicates the strength of a bank). Bank assets are the traditional size indicator
of a bank and this forms the basis of our hypothesis while the equity indicates the
strength of a bank. We calculated the growth rates of assets and equity during 1988-
2005.
We estimate the following growth equation based on other studies (Alhadeff and
Alhadeff, 1964; Rhoades and Yeats, 1974; Tschoegl, 1983; Akhaveln et.al, 1977
and Scholtens, 2000).
π = β0 + β1 (GASSET) + β2 (GEQUITY) + εt
15
Where
π = Growth in Profit after tax of banks.
GASSET = Growth in bank assets. The basic assumption is that being big is a
relative advantage that might result in a further rise in profit. On the
other hand we have to do with basic statistic property of large
numbers in that the growth rate declines with size. Therefore we
expect to find profit growth to become smaller with a bigger size of
the bank as measured by the amount of assets. Thus, with bank
profits and bank assets, it is clear that H1 tends to be confirmed,
whereas H2 is not. This might either be due to decreasing economies
of scale or simply results from basic statistical properties of large
numbers. Therefore the relationship may be positive, reflecting
economies of scale, or negative, reflecting greater ability to diversify
assets, which results in lower risk and lower required return (β3>0 or
β3<0).
GEQUITY = Growth in networth. We expect profit growth increases with the
growth in equity (size of tier-one capital). This implies that healthier
banks report better profit performance than banks that are less
endowed with tier-one capital hence the expected sign β2>0.
Furthermore, the result leads to the confirmation of H2, whereas H1
is not confirmed.
1.6.5 CAMEL Framework
This study will use the CAMEL approach to analyse capitalization, asset quality,
solvency, profitability, efficiency and liquidity in the banking industry;
16
Where C=capital adequacy, A=Asset Quality, M=Management Efficiency,
E=Earnings/profitability and L=Liquidity. (Bank of Ghana’s uses this approach to
measure soundness, asset quality, efficiency, solvency, profitability and liquidity of
Banks in Ghana).
1.6.6 Framework for SWOT Analysis
We will use two frameworks for SWOT analysis-The Balanced Score Card and
PESTEL. The Balanced Score Card looks at internal factors -strengths and
weakness while the PESTEL framework looks at external factors-opportunities and
Threat.
1.6.6.1 Balanced scorecard
The balanced-score card looks at the relationship between strategy and
performance. This framework will be used for bank’s specific strategy as depicted
below.
The Balanced Score Card
Financial Perspective Customer Perspective
Internal Perspective
Learning & Growth Perspective
Manage/improve Productivity
Enhance Brand Product Attributes
Manage Relationship
Innovate Processes
Customer Mgt Processes
Strategic Competencies
Strategic Technologies
Right Work Environment
Generate Revenue
Organisational Process
17
1.6.6.2 Macro-environmental influences – the PESTEL Framework
1.7 Organisation of work
This study will be divided into five (5) chapters. Chapter one looks at introduction,
statement of the problem, objectives of study, justification and organisation of the
study. Chapter looks at the literature review. This chapter includes definitions,
objectives and general terms used in this study. Chapter three looks at the overview
of the banking industry. This chapter looks at the External factors that influenced
the banking industry (PEST) during the study period between 1988 to 2005. It also
Political Government stability Taxation policy Foreign trade regulations Social responsibility
Economic Factors Business cycles GNP trends Interest rates Money supply Inflation Unemployment Disposable income Taxation Policy Foreign trade regulations Social responsibility
Socio-cultural factors Population demographics Income distribution Social mobility Lifestyle changes Attitudes to work and leisure Consumerism Levels of education
Technological Government spending on research Government and industry focus on
technological effort New discoveries/developments Speed of technology transfer Product innovation
Legal Labour Law Bank of Ghana Act Banking Act NBFI Law Securities Industry Law
Environmental Environmental
protection laws Waste disposal Energy consumption
The Banking
Industry
18
includes the SWOT analysis of banks in Ghana. Chapter four presents the analysis
relating to the various methods used for this study. It presents measurement of
competitiveness (e.g. CAMEL) of banks in Ghana. The study covers the period
1988 -2005 (Note FINSAP started in Ghana in 1988). The final chapter (five) looks
at conclusion and recommendations. It is followed by Bibliography, Reference and
appendices.
19
CHAPTER TWO
2.0 LITERATURE REVIEW
2.1 Theoretical Review
There is a vast academic literature on the measurement of competition in the
banking sector. Currently, there are two major approaches that may be used to
evaluate the level of market power within a particular sector. The approaches differ
according to whether the underlying model of the sector is structural or non-
structural.
The structural approach uses concentration measures or ratios to form hypotheses
about the relationship between concentration and market structure. The k-
Concentration Ratio (CRk) sums up the market shares (MS) of the k biggest banks
in the industry.
k CRk=ΣkMSi, 1=i
Where MSi is the bank’s market share of k biggest banks in the market.
Theoretically, industries in which the concentration ratio is under 50% are
considered effectively competitive. Industries in which the concentration ratio is at
least 50% but less than 70% as the case of Ghana, the industry is considered as
weak oligopolies (the other seventeen banks still command 43.8% and a situation
where the ratio is more than 70% are considered as strong oligopolies. Stronger
means that the banks in the industry have a greater ability to influence the price.
20
The Herfindahl-Hirschman Index (HHI) on the other hand, is calculated as the sum
of the squared market shares of all banks in the sector. That is
k HHI=ΣkMS2
i, 1=i
Where MSi is the bank’s market share and k represents the number of banks in the
banking industry.
In the case of a monopoly, when one firm has 100 percent of the market share, the
HHI will be equal to 10,000, which is the upper bound. The lower bound of zero is
attained when the market is perfectly competitive. Therefore, the larger the HHI,
the more concentrated the market becomes, since fewer firms control more of the
market. However, the relationship between concentration and market structure has
been an area of considerable debate among the structuralists. The discourse is
centred on two competing hypothesis: the “structure-conduct performance” (SCP)
hypothesis and the “contestability” hypothesis.
The SCP hypothesis asserts that there is a non-linear increasing relationship
between concentration and market power. That is, as the market becomes more
concentrated, the firms tend to collude and act as a monopoly in setting prices
above the competitive level. This implies that there is inverse relationship between
concentration and consumer welfare. Thus, the collusion hypothesis postulates that
market structure influences conduct/behaviour of firms through, for instance,
pricing and investment policies, and this in turn translates into performance. The
ultimate theoretical implication of the SCP hypothesis is that in concentrated
markets prices will be less favourable to consumers because of non-competitive
behaviour that arises in such market.
21
Although the SCP hypothesis is widely used in the manufacturing sector, in recent
times the model has been used in the banking industry. As Civilek and Al-Alami
(1991) rightly noted, the banking industry is very important to the economy and
empirical evidence on the SCP relationship can help in government regulatory
policies and in modifying the environment in which banks operate. Increased bank
concentration, by increasing the cost of credit, has the effect of reducing firms’
demand for credit and consequently affects the level of intermediation and retards
economic growth.
Alternatively, the contestability hypothesis suggests that even in the face of
increased concentration, incumbent banks may still behave competitively once
there exist a potential free entrant who can offer similar services at lower costs. The
contestability hypothesis thus postulates that market concentration is a result of
firms’ superior efficiency, which leads to larger market share and profitability.
There is no consensus on the relationship between concentration and market power.
While Berger and Hannan (1989) found evidence to support the SCP paradigm,
Jackson (1992) found the relationship to be the non-monotonic and even negative
for high levels of concentration, which contradicts the SCP. Furthermore, other
studies have been inconclusive and have also been refuted on technical grounds
(Shaffer, 1993).
Apart from the ambiguity surrounding the HHI theory, there are additional areas of
concern. One important shortcoming is that while the index accounts for the
number of Banks and their market share, it does not consider the distribution of the
shares as well as the geographical location of the banks. This makes comparisons
22
with other countries difficult, as two countries could have the same HHI but
different market structures due to the distribution of market shares.
The SCP paradigm can tabulated as follows:
SCP Paradigm Contestability/Efficiency Hypothesis
1. The SCP hypotheses that a highly
concentrated market causes collusive
behaviour among larger firms
1. Contestability suggests that even in the
face of increasing concentration, incumbent
banks may still behave competitively once
there is a free entrant who can offer similar
services at lower costs.
2. Concentration promotes collusion and
which works against the interest/welfare
of consumers
2. Concentration is the result of superior
efficiency leading to higher market share
and profitability. Consumer welfare is
enhanced.
3. The Collusion of larger firms leads to
superior performance (high profitability).
Efficiency of larger firms enhances
performance
4. The issue of efficiency was not
considered in this paradigm-i.e.
profitability is the result of collusion of
larger firms
4. Efficiency is the source of profitability
The inability of the structuralists to clearly define the relationship between
concentration and market power has prompted the search for non-structural models
by the ‘New Empirical Industrial Organisation’ (NEIO). These models, which
include those of Bresnahan (1982) and Penzar and Rosse (P-R) (1982 and 1987), do
not rely on explicit information about market structure in order to determine the
level of competition.
The Bresnahan methodology is executed by using a simultaneous equation model to
estimate a system of equations involving the supply and demand functions as well
as price equation. From the estimation, an index measuring the extent of firms’
23
market power is developed. Using this methodology, Shaffer (1993) rejected the
hypothesis of monopoly/collusion in favour of perfect competition in the Canadian
banking sector, while Nakane (2001) found the Brazilian banking sector to be
highly, though not perfectly competitive.
The P-R model provides a very simple approach to test the market structure of an
industry for competitiveness. Inferences are made based on the “H-statistic”, which
is calculated as the sum of the factor price elasticities estimated from a reduced-
form revenue function. Use of the reduced-form revenue equation eliminates the
problem usually encountered when trying to obtain supply side information. This is
due to the fact that revenues are more likely to be recorded than the cost data
necessary to execute the Bresnahan approach. Additionally, the Bresnahan
approach relies on aggregated data, and thus, does not account for bank
heterogeneity. Alternatively, when individual bank data are available, the P-R
approach may be preferred.
The H-statistic can be used to identify the three major market structures, namely,
monopoly/perfect collusion, monopolistic competition and perfect
competition/contestable market. Conclusions about the type of market structure are
made based on the size and sign of the H-statistic. The intuition behind the H-
statistic rests solely on microeconomic theory, which outlines how revenues react to
changes in input prices for the different market structures. Basically, an increase in
costs will reduce revenues for a firm enjoying monopoly power, but increase that of
a firm in a perfectly competitive market, proportionately. Therefore, it is expected
that a perfectly competitive market will have an H-statistic equal to one, while the
monopolist will have a negative H-statistic. The monopolistically competitive
24
market should have an H-statistic that lies between zero and one. A summary of the
testable hypotheses of the different market structures is presented below:
H-statistic Hypotheses
H = 1 Perfect competition or in a contestable market
0<H<1 Monopolistic competition
H≤0 Monopoly or collusion
An important advantage of the non-structuralist models is that they usually yield
similar results when applied. This is due primarily to the fact that they have clearly
defined hypotheses with specific interpretations. Therefore, there is little or no
room for ambiguity as is the case with the structuralists that have three potential
explanations for the one relationship. The use of the P-R model in particular
clarifies this ambiguity since it has clearly defined hypothesis to distinguish one
market structure from another.
In applying the P-R model, it is crucial to clearly define the production activity of
the bank since they are not exactly comparable to other types of firms. The current
literature presents two alternative approaches – the “production approach” and the
“intermediation approach”- that can be taken in empirical work.
2.2 Empirical Literature: - Determinants of Bank Profitability
Several variables are used as determinants of bank profitability in SCP studies in
the banking industry. We can essentially divide bank studies into two groups based
on the variables used to measure bank performance as a dependent variable. On the
one hand and in most studies, bank performance is measured by the level of
25
profitability. The profitability measures include the rate of return on equity (ROE),
rate of return on capital (ROC) and the rate of return on assets (ROA). In most bank
studies, emphasis is placed on measuring profitability in terms of ROC and ROA.
Smirlock (1985) notes that the use of ROA has provided strongest evidence on the
concentration-profitability relationship in banking. Keeton and Matsunaga ((1985)
assert that ROA is especially useful in measuring changes in bank performance
over time since banks’ income and expense components are more closely related to
assets. Several studies of the structure-performance hypothesis in the banking
system have used both ROA and ROE (Civelek and Al-Alami, 1991; Agu, 1992)
and Smirlock (1985) used all the three measures.
However, Civelek and Al-Alami (1991) found results based on ROA to be
statistically very inferior and justified the relative performance of ROE on the basis
that it reflects the efforts of managers interested in maximizing shareholders’
wealth. However, other studies have used ROA as a measure of profitability in
testing the SCP hypothesis in banking (Nolyneux and Forbes, 1995; Evanoff and
Fortier, 1988). The basic argument in favour of profitability measures in banking is
that banks are essentially multi-product firms and the use of profitability measures
eliminates problems associated with cross-subsidization between products and
services.
Alternatively, other researchers assess the performance in terms of bank prices
(Berger and Hannan, 1989; Rose and Fraser, 1976). The justification for use of
bank prices (interest rates) has been that the use of the price-concentration
relationship instead of the profit-concentration relationship tests the structure
26
performance hypothesis in a way that excludes the efficient structure hypothesis
(Berger and Hannan, 1989). The main argument in the price-concentration
relationship is that high levels of concentration allow for non-competitive
behaviour that results in lower interest rates offered to depositors and/or higher
lending rates to borrowers. However, Molyneux and Forbes (1995) argued that
price measures of performance create problems of cross-subsidization for a multi-
product firm. Besides, the use of prices does not take into account the effect of costs
(Morris, 1984). Whatever the measure of performance, empirical results on the
structure-performance hypothesis are also mixed and the performance of the model
in the banking system is weaker than in manufacturing.
At the centre of the traditional SCP hypothesis is the argument that market
concentration is a determinant of profitability. Concentration, defined as the extent
to which most of the market’s output is produced by a few firms in the industry
forms the basis for the explicit link between market structure and performance
through firms’ conduct (Bain, 1951; Scherer and Ross, 1990). The definition of
concentration in terms of output poses empirical problems in the banking industry
because of its multi-product nature, although the main products are loan-making
and deposit-taking services (Morris, 1985). However, since deposit data are readily
available, bank output is usually measured by total deposits. Competition theorists
argue that firms in highly concentrated industries refrain from competing among
themselves and might also refrain from raising deposit rates or lowering lending
rates (Morris, 1984). This would result in higher than average profitability. The
traditional expectation is that higher concentration leads to higher and monopolistic
performance.
27
There are several measures of market concentration, but the most common
measures in both industrial and banking studies have been the concentration ratio
(CR) and the Herfindahl-Hirschman index (HHI) (Scherer and Ross, 1990; Morris,
1984; Civelek and Al-Alami, 1991; Agu, 1992). As Berger and Hannan (1989)
point out, theory provides little guidance on the measure of monopoly power when
the type of noncompetitive behaviour is unknown. Results from empirical studies
on the performance of concentration in banking are mixed. Civelek and Al-Alami
(1991) find a statistically significant relationship between concentration and
performance in most years with perverse signs in some years in the Jordanian
banking system, while Molyneux and Forbes (1995) find overwhelming evidence of
a significant positive relationship between concentration and profitability. On the
other hand, Agu (1992) finds no significant statistical relationship between
concentration and profitability. Where the market variable is included in the model,
the concentration ratio fares poorly and the results tend to support the efficient
market hypothesis (Evanoff and Fortier, 1988; Smirlock, 1985).
The main variable in the efficient market hypothesis is the efficiency of firms that
can be proxied by market share (MS). Market share of industry deposit can be used
to test the alternative hypothesis of efficient market. We expect a positive
relationship between market share and profitability. Larger market shares are a
result of efficiency that in turn leads to higher profitability.
Several control variables that take into account firm-specific and market-specific
characteristics are theoretically justified and included in empirical studies of the
banking industry. One of the variables is bank size. Bank size is measured as banks
total deposits or assets or as an average measure based on total assets (Civelek and
28
Al-Alami, 1991; Molyneux and Forbes, 1995; Smirlock, 1985; Evanoff and Fortier,
1988). The bank size variable takes into account differences brought about by size
such as economies of scale. We expect that larger banks compared with smaller
banks’ can reap economies of scale and have greater diversification opportunities.
However, according to Evanoff and Fortier (1988) and Smirlock (1985) any
positive influence on profits from economies of scale may be partially offset by
greater ability to diversify assets resulting in a lower risk and a lower required
return. Therefore, the impact of bank size, a priori, is indeterminate. The empirical
results on the performance of bank size variable are mixed, with conclusions of no
economies of scale (Civelek and Al-Alami, 1991; Molyneux and Forbes, 1995) and
others having significant positive (Evanoff and Fortier, 1988) and negative
(Smirlock, 1985) relationships.
Since profit measures are usually not adjusted, the capital-asset ratio (CAPAST) is
included to account for differences in levels of risk between firms. Lower CAPAST
is associated with high risk. We postulate a negative relationship between capital-
asset ratio and profitability performance. However, as a measure of risk, the capital-
asset ratio also produces perverse sign although it is statistically significant
(Molyneux and Forbes, 1985). Envanoff and Fortier (1988) found a significant
negative relationship between return on assets and capital-asset ratio.
Another measure of risk included is the loan-asset (LTOAST). The loan-asset ratio
is traditionally included in the model to capture bank-specific risk. Portfolio theory
postulates that risky investments are usually associated with higher returns than
primary assets. The loan-asset ratio is expected to be positively correlated with
bank profitability. Empirically, this measure of bank risk has produced perverse
29
results, suggesting that there is reduction behaviour among bank managers (Civelek
and Al-Alami, 1991; Molyneux and Forbes, 1995; Evanoff and Fortier, 1988). Agu
(1992) also found a negative and weak statistical association between the loan-
deposit ratio and profitability in the Nigerian banking system.
The bank’s relative cost of funds is captured by ratio of demand deposits to total
deposits (DDTDEP). Demand deposits are a relatively inexpensive source of funds.
We expect that the higher the ratio of demand deposits to total deposits, the higher
the level of profitability. Evanoff and Fortier (1988) and Smirlock (1985) found a
significant and positive relationship between the ratio of demand deposits to total
deposits and bank profitability.
Other variables are included to account for market demand characteristics. These
include market size and market growth rate. Market size is measured by total
market deposits (MKDEP). Large markets should be easy to enter and bank
customers in such markets tend to be sophisticated, hence a negative relationship
between market size and profitability. However, as noted by Evanoff and Fortier
(1988) and Smirlock (1985), this negative relationship may be partially offset if
banks in these markets take on riskier portfolios requiring higher returns. The
relationship between market size and bank profitability may be either positive or
negative. The growth of the market (MKGRO) is included because rapid market
growth expands profit opportunities for existing banks, but if growth encourages
entry then a negative relationship may be observed. Civelek and Al-Alami (1991)
have argued that larger market size or an expanding market enables banks to
differentiate their products and consequently generate higher profits.
30
In summary, the SCP hypothesis has now been widely used in the analysis of bank
markets and there exists evidence in support of the structure-performance
hypothesis, although the competing efficient market hypothesis is also gaining
empirical support. The overall evidence suggests that high market concentration
may be an institutional feature that limits savings mobilisation and intermediation.
Alternatively, the efficient market hypothesis asserts that market concentration
results from firms’ ability to secure larger market shares because of their efficiency.
2.3 Summary of Overview of literature -Measuring Competition in the
Banking Industry
2.3.1 Structural Approaches – SCP Paradigm
Structural approaches are based on the SCP paradigm. SCP is short for “Structural
Conduct Performance”. The SCP paradigm posits a relationship between market
structure, firm conduct and market performance. It says that in the highly
concentrated markets with a small number of large, dominant firms it is easy for
these firms to collude and raise profit to levels not compatible with perfect
competition. (Recall that in perfect competition new firms enter the markets as long
as economic profits are greater than zero. Thus, in the long run equilibrium prices
equal marginal cost).
Hence, the SCP paradigm assumes that the degree of competition is an inverse
function of concentration.
2.3.1.1 Concentration Measures
In order to be able to assess competition we thus have to measure concentration,
which is, however, much easier than measuring competition.
31
To be in the position to understand the two concentration indices most commonly
used in the SCP context, we need the following notation: the number of firms in the
market is denoted by n, the market share of firm i is denoted by si, the arithmetic
mean of market shares is denoted by s, and the standard deviation of market shares
is defined by:
σ = 1 ∑ni=1 (si – s)
2 = 1 ∑ni=1 si
2 – s
2 n n
The k – firm concentration ratio (CRk) sums up the market shares of the k
biggest firms in the markets:
The Herfindahl-Hirschman index (HHI) sums up the squared markets shares
of all firms in the market:
Another concentration measure (or rather variation measure) is the variation
coefficient (VC), which relates the standard deviation of the
σ market shares to their arithmetic mean: VC: = . We have the s
following relationship between HHI and VC: HHI = (VC2 + 1)/n.
Comments
The SCP is challenged by the following facts and theories:
k CRk : = ∑ si Where si > sj for i<j I=1
n HHI: = ∑ si
2
i=1
32
1. The efficiency hypothesis states that high concentration and market power
are the consequences of some outperforming firms being more efficient than
their rivals
2. The contestability hypothesis assumes that in a market with low exit and
entry barriers (contestable markets), even if there is just a small number of
firms, these firms are prevented from gaining economic profits because they
perceive the constant threat of the entry of potential rivals into the market.
3. Finally empirical clearly supporting the SCP paradigm is scarce.
2.3.2 Non – Structural Approaches
The conjectural variation model
Markups
In basic microeconomic theory competition is characterize by the markup firms
charge on marginal cost. This markup is measured by the Lerner index.
Where P denotes prices and c’ is marginal cost. (In perfect competition c’ = P and
thus L = 0). However, data availability usually (and particularly in banking) does
not allow to calculate the Lerner index. This is why T. Bresnahan (among others)
has introduced a conduct parameter, the conjectural variations parameter (CV),
which captures the perceived inter-dependence of firms with their rivals and which
can econometrically be estimated. The concept is formally developed out of the first
– order condition of profit maximizing oligopolist.
CV definition
P – c’ L: = P
33
The CV and the normed CV will be denoted by λi*, respectively. They defined as
follows:
Where xi denotes the output of the i-th firm, X denotes industry output, and n is the
number of firms.
CV Interpretation
The CV has three equivalent interpretations:
It represents the conjectured degree of output change of the competitors if bank i
changes its output.
It indicates how much of the monopoly markup (which equals inverse elasticity) is
actually charged by the players of the observed market.
Alternatively, λi* can be interpreted as an elasticity adjusted Lerner index.
CV Implication
The following table shows the implication of the different values of the CV:
Conjectural variation parameters
λi* = 1 λi = n Monopoly or perfect competition
λi*= 1
n
λi = 1 Cournot oligopoly
λi* = 0 λi = 0 Perfect competition
Economic intuition:
dX d∑j≠ixj 1
λi: = = 1+ and λi*:= λi
dxi dxi n
34
Monopoly or perfect collusion: Each player wants to maintain its market share 1/n.
Hence, an output increase by player i will cause a proportional increase in output of
each “partners”. Thus industry output X increase proportionally and dX/dxi = n.
A Cournot oligopolist assumes by definition that the other players will not change
their output if he increases his own output. Hence, d∑j≠ixj / dxi = 0.
In perfect competition, price (= marginal cost) and thus (by the industry demand
function) industry output are exogenous to every one firm. Hence, dX/dxi = 0.
CV derivation
We will now give the formal derivation of the CV parameter from the comparative
statics of a profit maximizing Cournot oligopolist.
Let us assume n banks in an oligopolistic market supplying one homogenous
product. Then, the profit of the bank i is given by:
πi = P(X, EXD) xi – ci(xi, EXsi)-Fi
Where P is the price, ci is the bank i’s variable cost, xi is the output of bank i, X is
industry output, EXsi are exogenous factors affecting bank i’s cost but not industry
demand, EXD are exogenous factors affecting industry demand but not marginal
cost and Fi is bank i’s fixed cost. Defining c’i the marginal cost of bank i, the first-
order condition for profit maximization is:
dP dX 0 = P(X, EXD) +xi - c’i(xi). dX dxi
Summing over all banks and dividing through n yields:
1 dX 1 n 0 = P(X) + XP’ - ∑ c’i(xi); n dxi n i=1
35
hence,
1 n P = λi* XP’ + ∑ c’i. n i=1
With the semi elasticity of demand ňD and average marginal cost c’ one has:
P = λi*ň-1D + c’
This relationship reflects how prices are affected by demand elasticities and cost
where the oligopolist is assumed to maximize perceived profits through
consideration of the reaction of other players.
Another re-arrangement illustrates the interpretation of λi* as part of the Lerner
index:
P – c’ 1 L = = λi* (*) P ŋD
Hence, λi* indicates to which extent the maximum markup is actually charged.
Note that in a monopoly the Lerner index equals inverse elasticity. This is
consistent with assigning the value 1 to λi* in case of monopoly as done above.
Multiplying (*) with ňD yields the elasticity-adjusted Lerner index Ln:
P – c’ λi* = ŋD =: Lŋ P
The elasticity-adjusted Lerner index has an important feature: it differentiates
whether high price-cost margins are due to the abuse of market power or to low
elasticities.
36
2.4 The Panzar-Rosse approach
2.4.1 H-statistic
By the analysis of the comparative statics properties of the reduced form revenue
equation at the firm level Panzar and Rosse have developed the H-statistic, which
allows to test for different market equilibria. In their model they try to draw
conclusions from the reaction of firm revenues to changes in input prices, such as
personnel expenses or fixed capital cost. Therefore, the H-statistic sums up the
factor price elasticities of firm revenues:
Where R* = R* (w, z, t) denotes the reduced form revenue equation, with z being
exogenous variables shifting the firm’s revenue from t being exogenous variables
shifting the firm’s cost function, and w = (w1……..wn) being factor prices.
Testable Implications
The following table shows the testable implications of the possible hypotheses:
Competitive environment test
Monopoly or perfect collusion H ≤ 0
Symmetric Chamberlinian equilibrium H ≤ 1
Long run competitive equilibrium H = 1
(Recall that in Chambarlinian equilibrium the “monopolist” earns zero economic
profits because it faces competition through slightly different products offered by
rivals (product differentiation)).
n dR* wi H: = ∑
i=1 dwi R*
37
Economic intuition:
Perfect competition: Suppose all input factor prices rise by 1%. As we have
assumed linear homogeneous cost functions the average total cost curve shift
upward by 1% for all output levels. Thus prices increase by 1% as well. As the
minimum point of the average total cost curve does not move optimum output
remains constant. Thus revenue rises by 1%. The effect of a 1% increase of factor
input prices is a 1% increase in revenue.
Monopoly: An increase in input factor prices produces an upward shift of cost
functions. Thus prices rise and output falls. As monopolist produce on the elastic
portion of the inverse demand schedule this has negative total effect on revenues.
Hence an increase in input factor prices causes a decrease in revenues.
Chamberlinian equilibrium: As in a monopoly, firms produce on the elastic portion
of the inverse demand schedule. Hence, higher input factor prices resulting in
higher prices and lower output have a negative effect on revenues. But as, similarly
to what happens in perfect competition, “competitors” exit the market the
monopolistically competitive firm faces higher demand which produces a positive
effect on revenues. Thus the total effect may be positive or negative.
38
Empirical Work on PR H-Statistics
We summarize the empirical work on PR/H-Statistics as follows:
Author Variable Period Banks/FI H-Statistic Molyneux
et.al (1994)
Interest
Revenue
1986
1989
109
171
0.6282
0.8525
Bikker and
Haaf (2002)
Interest
Revenue
1991
1997
213
0.6100
0.64
Claessens and
Laeven
(2004)
Interest
Revenue
1994-2001 106 0.74
Casu &
Girardone
(2005)
Total
Revenue
1997-2003 63 0.307-0.327
Mathews et.
al (2006)
Total
Revenue
1980-1991
1992-2004
10
12
0.7506
0.5022
Mathews et.
al (2006)
Interest
Revenue
1980-2004
10-12 0.5648
Source: Mathews, K.; Murinde, V. and Zhao, T (2006)
39
CHAPTER THREE
OVERVIEW OF BANKING INDUSTRY
3.0 Introduction
The structure of the formal financial sector in Ghana was as a result of financial
policies pursued over the years. Deliberate policies were implemented to enhance
the efforts of institutional building based on the financial service needs of the nation
at various stages of its development. Policies aimed at addressing weaknesses
inherent in the colonial banking system as well as streamlining the banking
operations were initiated.
Over the years specialised banks were created. The objectives of these banks were
tailored to meet the financial needs of specific sectors of the economy and promote
the development needs of these sectors. For instance, banks were established to
promote investment, construction and agricultural development in Ghana. Along
the line, the Government also created several rural banks, which were widely
dispersed throughout the country. This was to enhance the financial deepening of
the rural economy so as to facilitate the mobilisation of rural resources for the
financing of micro and other small-scale economic activities in their catchment
areas.
The state led financial sector policy included many interventions in financial
markets including interest rate controls, direct credit and subsidies. Under this
regime, the banking system did not grow. In addition, the system was characterised
by weak legal and regulatory framework and inadequate supervisory coverage.
Prudential norms, accounting and reporting standards were not clearly defined by
40
law. The banks piled up huge debts with their balance sheets showing chunks of
non-performing assets. The deterioration in the financial sector is well illustrated by
the value of non-performing loans, which was estimated at the beginning of the
financial sector restructuring, at 41% of total credit extended to state enterprises and
private firms (World Bank, 1994).
The financial sector adjustment programme (FINSAP) sought to liberalise the
financial sector, improve savings mobilisation and enhance the efficiency of credit
allocation through interest rate liberalisation and competition and enhance the
soundness of the banking system through an improved regulatory and supervisory
framework as well as develop money and capital markets.
This chapter reviews the financial sector policies and reforms implemented in
Ghana since independence and analyses their impact on the banking system. The
banking system, which includes commercial and development banks (which since
the 1970s have accepted deposits and undertaken commercial banking activities),
comprises the major part of the financial system in Ghana. The chapter tries to
assess how effective the financial sector reforms have been in addressing the
consequences of the pre-reform financial policies, and in particular whether
financial liberalisation, bank restructuring and prudential reforms have succeeded in
fostering the development of a more efficient, competitive and prudentially sound
banking system.
The first part of the chapter describes the pre-reform financial sector policies which
involved control over interest rates, attempts to control the sectoral allocation of
lending and the establishment of public sector banks, while the second part assesses
41
the impact of these policies on financial depth, on credit supply and on bank
distress. The third part of the chapter outlines the objectives and main components
of the financial sector reform programme implemented since 1988. The chapter
further assesses the progress of the restructuring of the public sector banks, which
were insolvent at the end of the 1980s. The chapter concludes by looking at the
environmental factors which explains the banks’ performance over the last two
decades as well as SWOT analysis of banks in Ghana.
3.1 Post Independence Financial Sector Policies
Extensive government intervention characterised financial sector policies in the
post independence period (Brownbridge and Gockel, 1997). Public ownership
dominated the banking system: all the banks set up between the early 1950s and the
late 1980s were wholly or majority owned by the public sector, while the
government also acquired minority shares in the two already established foreign
banks in the mid 1970s. Interest rates were administratively controlled by the Bank
of Ghana (BOG) and a variety of controls were also imposed on the asset
allocations of the banks, such as sectoral credit directives. The motivation for these
policies was the belief that, because of market imperfections and the nature of the
financial system inherited from the colonial period, the desired pattern of
investment could not be supported without extensive government intervention in
financial markets. Policies were motivated by three objectives:
To raise the level of investment;
To change the sectoral pattern of investment, and
To keep interest rates both low and stable (Gockel, 1995, p117). Financial
sector policies were characterized by severe financial repression, real
42
interest rates were steeply negative and most of the credit was channelled to
the public sector.
3.1.1 Establishment of public sector banks
The government established its own commercial and development banks for two
reasons:
The belief that the operational focus of the foreign commercial banks
(Barclays Bank Ghana and Standard Chartered Bank), in particular their
lending policies, was too narrow, thus depriving large sections of the
economy of access to credit; and,
Second, the contention that sectors important for development, such as
industry and agriculture, required specialised financial institutions (FIs) to
supply their financing needs. Hence the need to set up National Investment
Bank for Industrial development, Agricultural Development for
Agricultural development and Bank for Housing and Construction for
Housing and Construction industry.
Dissatisfaction with the foreign banks focused on their conservative lending
policies, modelled on those employed in the UK, and in particular their demands for
the types of security (life insurance policies, stock certificates, bills, etc) which
were uncommon in Ghana (Newlyn and Rowan, 1954, p82).
The Ghana Commercial Bank (GCB) was set up in 1953 to improve the access to
credit of indigenous businesses and farmers. It was also instructed to extend a
branch network into rural areas, so that people in the rural areas would have access
to banking facilities, and was heavily involved in lending to agriculture. Ghana
43
Commercial Bank (GCB) became the largest bank in Ghana: it had 36% of total
bank deposits in the late 1980s and currently it is still the largest Bank in terms of
assets and deposits with a market share of deposits of 19%.
It must be noted that the Ghana Commercial Bank (GCB) was set up following
the recommendation made by the Trevor Report, an enquiry commissioned by the
government into banking in the then Gold Coast. The enquiry had been prompted
by local criticisms of the operational practices of the expatriate banks and the
workings of the sterling exchange system.
The Social Security Bank (SSB), which is now called SG-SSB, was set up in 1977.
It grew rapidly to become the second largest bank in Ghana, with 18% market share
of deposits in the late 1980s, providing credit, including longer term loans, for
businesses and consumers. It also invested in the equity of several large businesses.
Two smaller commercial banks began operations in 1975. The National Savings
and Credit Bank (NSCB) - formerly the Post Office Savings Bank - and the
Cooperative Bank: these were expected to provide consumer loans, credit for small
industries and cooperatives. A merchant bank, Merchant Bank Ghana (MBG), was
set up in 1972 as a joint venture between ANZ Grindlays, the government and
public sector Finance Institutions (FIs), with the former having a 30% stake.
To fill the perceived gaps not served by the commercial banks, especially for long
term finance, three development finance institutions (DFIs) were set up: the
National Investment Bank (NIB), in 1963, to provide long term finance for
industry; the Agricultural Development Bank (ADB) in 1965 (The Agricultural
Development Bank (ADB) was originally called the Agricultural Credit and
44
Cooperative Bank); and the Bank for Housing and Construction (BHC), in 1974, to
provide loans for housing, industrial construction and companies producing
building materials. The DFIs mobilised funds from deposits as well as from
government and foreign loans and undertook commercial banking activities as well
as development banking.
The government did not nationalise the two foreign owned banks - Barclays Bank
and Standard Chartered Bank (SCB) - which had been established in Ghana during
the colonial period, but it did acquire 40% equity stakes in the banks following an
indigenisation decree enacted in 1975 (which was applied to all large scale
industries).
Historically, a Cooperative Bank had been set up in 1946 to serve cooperatives in
the cocoa growing areas, but it was closed down in 1961 for political reasons, and
its assets and liabilities transferred to GCB in the following year (Adjetey, 1978,
p36). The first three commercial banks set up - Barclays, Standard Chartered Bank
and Ghana Commercial Bank (GCB) - were referred to in Ghana as the primary
banks. The commercial banks, merchant banks and DFIs set up after independence
were referred to as secondary banks. This distinction is no longer used because of
the Universal Bank business now. A third foreign bank - Bank of Credit and
Commerce (originally known as the Premier Bank) - was set up in 1978. The
government also has an equity stake in this bank. Its parent bank - Bank of Credit
and Commerce International - was closed down in 1991.
45
3.1.2 Interest Rate Policy
The BOG determined the structure of bank interest rates, including minimum
interest rates for deposits and maximum lending rates. Priority sectors, such as
agriculture, received preferential lending rates: in some cases these were lower than
the minimum savings deposit rates. The structure of interest rates set by the BOG
made no allowance for loan maturity or risk; indeed incentives for banks to extend
credit were often perverse because riskier sectors such as agriculture were accorded
a preferential rate. Nominal interest rates were held below prevailing inflation rates
in most years and, when inflation accelerated in the second half of the 1970s and
early 1980s; real interest rates were highly negative.
Table 3.1: Selected Interest Rates and Inflation: 1975-1995 (%) Year 12 month Savings Lending Lending Treasury Inflation
deposits deposits (agric) (Others) Bills (Yearly Av.) 1975 8 7.5 n/a 12.5 7.8 29.8 1976 8 7.5 6 11.5-12.5 7.8 55.4 1977 8 7.5 8.5 11.5-12.5 7.8 116.5 1978 13 12 13 18.5 12 73.1 1979 13 12 13 17.5-18.5 12 54.5 1980 13 12 13 17.5-18.5 12 50.2 1981 19 18 20 25.5 18.5 116.5 1982 9 8 8 14 9.5 22.3 1983 12.5 11 12.5 19 13 122.8 1984 16 14.5 16 22.5 16.8 39.7 1985 17 15.5 18 22.5 16.8 10.3 1986 20 18.5 22.5 23 19.8 25.6 1987 20-22 21.5 22.8-30 26 19.6 39.8 1988 17-22 17-21.5 23-30 23-30.3 19.8 31.4 1989 12-20 15-19 22.5-30 22.5-30.3 19.9 25.2 1990 14-22 14-18 22.5-29.5 22.5-30.3 27.5 37.2 1991 16-24 10.6-19.5 19.5-31.5 23-31.5 18 18.0 1992 15.5-22.5 11-16 19.8-26.5 24.29 25.4 10.1 1993 17-32 15-22.5 24-39 26-39 32 25.0 1994 14-31 13.8-22.5 22.5-35.5 29-37.5 29.5 24.9 1995 18-34 21.5-31 27-38.5 32-40.5 33 58.50 Sources: Gockel (1995, p.320); Bank of Ghana (various issues)
46
3.1.3 Credit Controls
Sectoral credit guidelines, based on an annual credit plan drawn up by the Bank of
Ghana (BOG), were imposed on the banks to channel credit towards the priority
sectors of agriculture, manufacturing and exports: these usually took the form of
maximum permitted percentage increases in the stock of loans to each sector, with
priority sectors accorded larger increases than non priority sectors. The sectoral
credit directives appear not to have been strictly enforced. Since 1981 an additional
regulation stipulated that lending to agriculture should comprise a minimum of 20%
of total loans, with shortfalls to be transferred to the Agricultural Development
Bank (ADB). Foreign companies were required to obtain Bank of Ghana (BOG)
permission to access loans from domestic banks.
3.1.4 Demonetization Exercises and Anti Fraud Measures
A series of measures taken by the government during the late 1970s and early
1980s further eroded public confidence in the holding of currency and bank
deposits. The most drastic were two currency appropriations in 1979 and 1982,
initiated in an attempt to reduce the money supply and therefore inflation, but the
public were also discouraged from holding bank deposits by a number of measures
aimed at countering fraud. Banks were ordered in 1979 to furnish information to the
authorities about customers at the authorities’ request. In 1982 accounts in excess of
C50,000 were frozen pending investigation for fraud or tax liabilities, bank loans
for the financing of trade inventories were recalled and compulsory payment by
cheque was introduced for business transactions in excess of GHC1,000.
47
3.1.5 Prudential Regulation and Supervision
The 1970 Banking Act provided the regulatory framework for the banking industry.
This imposed minimum paid up capital requirements for foreign and locally owned
banks of GHC2 million and GHC0.5 million respectively (the latter was
subsequently raised to GHC0.75 million). The minimum capital requirements were
worth very little by the early 1980s because of inflation. At the end of 1983, the
minimum paid up capital for a local bank was equivalent to only $16,000. Banks
were also required to maintain capital and reserves of at least 5% of their total
deposits (rather than risk assets which would be more relevant as an insurance
against insolvency).
The capital adequacy requirements were in any case largely meaningless because of
the absence of clear accounting rules regarding the recognition of loan losses,
provisioning for non performing assets and the accrual of unpaid interest. The true
state of banks’ balance sheets, including the erosion of their capital as a result of
loan losses, could therefore be concealed. Although the Banking Act did provide
some rules to constrain imprudent behaviour by banks, penalties for infractions
were minimal. There were also important regulatory omissions, such as limits on
single borrower loan exposures.
A Bank Examination Department (BED) was established in the Bank of Ghana
(BOG) in 1964 but its activities were largely confined to ensuring that banks
complied with allocative and monetary policy directives, such as sectoral credit
directives, and reserve requirements, rather than prudential regulations. The BED
also lacked adequate resources to monitor and inspect the banks. In the early 1980s
it had only five professional staff, of which only two had any training in bank
supervision. On site examinations were infrequent and off site supervision was
48
impeded because of deficiencies in bank reporting (i.e. the submission of financial
data by the banks to the BOG). Hence the BED lacked the information necessary to
evaluate the condition of banks’ asset portfolios, their profitability and solvency
(World Bank, 1986, p65).
3.2 Impact of Pre-Reform Policies on Banking Markets
The pre-reform policies of financial repression and public ownership of banks had
important consequences for the banking system. Financial depth collapsed, and
with it the ability of the banking system to supply credit, including to the priority
sectors which financial policies aimed to support. With the exception of those banks
which retained foreign equity participation (ie Barclays Bank Ghana, Standard
Chartered Bank and Merchant Bank Ghana), the banks in Ghana all became
insolvent as a result of bad debts and investments in commercially unsuccessful
ventures.
3.2.1 Financial Depth
Financial repression caused severe financial shallowing in Ghana. The broad
money/GDP ratio, which had been relatively stable at around 20% from 1964-74,
rose briefly in the mid 1970s (to a peak of 29% in 1976)7 and then collapsed to
12.5% in 1983 (table 3.2). Moreover bank deposits became less attractive relative to
cash: the currency/M2 ratio rose from 35% in 1970 to 50% in 1983, reflecting a
process of disintermediation from the formal financial system. Bank deposits
amounted to only 7.4% of GDP in 1984, having fallen from 19.5% of GDP in 1977.
49
Table 3.2: Money Supply, Bank Deposits and Credits to the Private 1970-1994 Year M2/GDP Bank Deposits/ Bank Claims on
Private (%) GDP (%) Private/GDP (%)
1970 19 12.4 8.2
1971 19 12.6 12.6
1972 23.7 15.2 10.1
1973 22.6 15.6 5.3
1974 21.6 14.4 5.7
1975 26.2 17 5.8
1976 29.1 18.3 5.9
1977 29.7 19.5 5
1978 26.6 16.6 3.5
1979 22.8 14.2 2.8
1980 20.4 12.4 4.1
1981 22.9 14.7 3.1
1982 19.8 12 3.7
1983 13.2 7.8 2.7
1984 12.5 7.4 3
1985 16 9.7 4.5
1986 16.5 10.4 5.2
1987 17.1 10.9 4.3
1988 17.3 11.2 3.6
1989 16.9 11.1 5.6
1990 13.6 9.7 3.9
1991 13.4 9.3 3.2
1992 17.5 11.8 4.6
1993 16.9 12.7 4.6
1994 18.7 12.8 5.3
Sources: Bank of Ghana (various issues) and Quarterly Digest of Statistics (various issues)
50
Aryeetey and Gockel (1990), in a study of the informal financial sector, found that
street banking was increasing in contrast to formal sector intermediation. The main
causes of the decline in financial depth included the sharply negative real deposit
rates, which deterred savers from holding financial assets. The currency
appropriations of 1979 and 1982, the freezing of bank accounts and the decree
authorising the government to demand details of customers’ bank accounts from
banks, all served to erode public confidence in holding domestic currency and using
the banking system, instead encouraging the use of informal financial
intermediaries and the holding of savings in the form of physical assets, such as
buildings and construction materials, or foreign assets. Long waiting times in
banks, a consequence of inefficiency and the lack of large denomination bank
notes, also deterred the public from depositing cash in banks. Moreover the banks
were discouraged from active deposit mobilisation because interest rate controls
and the very high statutory reserve and liquid asset requirements prevented banks
from channelling depositors’ funds into remunerative outlets. At times the banks
refused to open new time and savings deposit accounts and refused to pay interest
on accounts above a certain amount (Leite, 1982).
3.2.2 Lending to Priority Sectors
Although pre-financial sector policies aimed to support priority sectors through the
use of sectoral credit guidelines and preferential interest rates, the supply of credit
to these sectors declined precipitously in real terms. Credit to the whole of the non
government sector (which included both priority and non priority sectors) amounted
to only 3.6% of GDP in 1983, having fallen from 9.8% in 1977 (World Bank,
1986). The main reasons for the decline in credit supply were the fall in financial
depth discussed above combined with crowding out by the government’s borrowing
requirements, which reduced the aggregate volume of funds which banks had to
51
lend to all non government borrowers, including public enterprises. The
government took 87% of net domestic credit in 1983.
While the total volume of bank lending fell, the sectoral credit directives were not
always effective in ensuring that the desired sectoral distribution of credit was
realised. Although credit to agriculture usually exceeded the stipulated minimum of
20% of total loans, there is anecdotal evidence that agricultural loans were diverted
to other uses, such as trading. Credit to other priority sectors often fell short of the
maximum permitted under the credit ceilings while that to non priority sectors often
exceeded their ceilings (World Bank, 1986, pp38-39).
Banks were discouraged from allocating their available funds to priority sectors
because of the lending rate controls which made no allowance for the risk of
lending, or for transactions costs. Banks had strong incentives not to extend credit
to potentially risky borrowers but to invest in government securities instead, since
the latter offered the same, or almost the same, interest rates, but unlike the former
were both liquid and virtually risk free.
3.2.3 Financial Distress among Public Sector Banks
Financial distress afflicted all the public sector banks in the 1980s. The DFIs appear
to have run into serious difficulties first, while the emergence of distress in the two
main commercial banks - GCB and SSB - was delayed until the mid 1980s. All the
banks were rendered insolvent by non performing assets (NPAs) and had to be
restructured in 1989-91, when a total of C62 billion of NPAs was identified in the
banking system and replaced by BOG bonds or offset against liabilities of the banks
to the BOG or the government. Most of the NPAs were transferred to the Non
Performing Assets Recovery Trust (NPART) in 1991.
52
The NPAs included non performing loans, letters of credit and equity investments
which yielded no income. Non performing loans amounted to GHC32 billion,
representing 41% of all outstanding loans to the non government sector (Kapur et
al, 1991, pp60-61). Of the C50.4 billion of NPAs which were eventually transferred
to NPART in 1991, GCB, BHC and SSB accounted for 28%, 25% and 25%
respectively (Table 3. 4). Almost all of the NPAs had been incurred by banks
wholly owned by the public sector: Barclays Bank Ghana, Standard Chartered Bank
and Merchant Bank Ghana accounted for only 4% of the NPAs transferred to
NPART (see table 3. 4). The total assets of all the banks at the end of 1989
amounted to C316 billion: hence NPAs accounted for almost 20% of the banks’
total assets. Aggregate capital and reserves of the banks was negative C2.4 billion
at the end of 1989 (Bank of Ghana, QEB, 1992, statements 2A and 2B).
Loan losses would probably have been much greater had not lending been curtailed
by the high liquid reserve requirements and credit ceilings imposed in the 1970s
and 1980s. The DFIs also incurred heavy losses from foreign exchange exposures:
they had converted foreign currency liabilities into domestic currency assets
without providing for the risk involved.
The main reason for the losses incurred by the public sector banks was that they had
been pressured into extending finance to unbankable projects to meet
developmental and political objectives. The banks were very vulnerable to political
pressure because the government had the authority to appoint and dismiss the
banks’ executives and managers. The economic crisis and the radical changes in
economic policy implemented during the 1980s also contributed to the deterioration
53
in the banks’ asset portfolios. Some of the projects financed by banks were closed
down because foreign exchange to purchase inputs was unavailable. Many
importers, to whom letters of credit had been extended by the commercial banks,
were unable to meet their obligations following the large exchange rate
devaluations which began in 1983.
Around 47% of the NPAs transferred to NPART had been extended to state-owned
enterprises (SOEs), many of which were not economically viable. The government
had provided guarantees for some of the loans extended to SOEs but these had not
been honoured. The other 53% of NPAs transferred to NPART were accounted for
by private sector creditors or joint ventures between the private sector (including
foreign companies), traditional councils and the banks. These were mainly medium
and small scale companies in import substituting industries. Many of these projects
were not properly appraised by the banks providing the finance, some were clearly
only marginally viable, if viable at all, and the collateral provided had little resale
value. Loan documentation was inadequate, as was loan monitoring and little effort
was made to recover many of the bad debts.
NPART (1994, pp7-12) provides an interesting account of the problems which led
to the collapse of four projects financed by the BHC, NIB and SSB. The problems
afflicting these projects included inappropriate technical design, equipment
breakdowns, disputes between shareholders, the withdrawal of foreign partners and
the unavailability of inputs. Most of the assets owned by these companies consisted
of equipment which had been left lying around in fields without maintenance for
years after the collapse of the projects and hence were virtually worthless when
eventually auctioned by NPART.
54
Corruption and fraud contributed to the scale of the banks’ losses with politically
connected borrowers being able to access unsecured loans which would not have
been given to them on commercial grounds and to avoid pressure to repay. During
the Acheampong regime in the 1970s, loan applicants obtained notes from military
officers and took these to bank managers:
If the manager did not comply he risked being sacked over the radio. Many of the
BHC’s bad debts had been extended to military personnel. In addition some of the
banks’ staff lacked the necessary qualifications and expertise because recruitment
was influenced by nepotism and political influence.
The public sector banks continued in operation throughout the 1980s despite the
poor quality of their asset portfolios. Ghana Commercial Bank (GCB) and Social
Security Bank (which is now called SG-SSB) were able avoid liquidity shortages
partly because the very high reserve requirements imposed in the 1970s and the
credit ceilings in the 1980s forced them to hold large volumes of liquid assets. But
the DFIs, whose asset portfolios were both longer term and more badly impaired
than those of the commercial banks, and which had the additional burden of foreign
currency denominated liabilities, were worse affected by financial distress and
suffered liquidity shortages in the early 1980s.11 Both the Bank for Housing and
Construction (BHC) and National Investment Bank (NIB) required injections of
equity and loans from the BOG to maintain liquidity and boost capital, but this only
allowed further large losses to be incurred in the second half of the decade.
The true state of the banks’ balance sheets was concealed by the failure to make
adequate provisions for NPAs and to suspend accruing unpaid interest as income.
55
Hence banks appeared solvent, according to the data in their published accounts,
(even though the capital adequacy levels of some banks were very low) when
appropriate accounting procedures would have revealed that losses had completely
eroded capital. The extent of the financial distress in these banks was only revealed
when diagnostic studies were carried out in 1987 as part of the preparations for the
Financial Sector Adjustment Programme (FINSAP).
Table 3.3a : NPAs Transferred to NPART by Type of Borrower (¢'Millions) Amount %
Private Sector 26,487 52.5
SOEs 23,946 47.5
Total 50,433 100
Excludes NPAs transferred from Ghana Cooperative Bank
Source: NPART (1991, p.23)
3.3b : NPAs Transferred to NPART by Banks (¢'Million) Bank Amount of NPAs
Transferred % of total NPAs Transferred
to NPART (¢'Million) to NPART
GCB 14,321 28.4
SSB 12,585 25.0
NSCB 725 1.4
ADB 1,293 2.6
NIB 6,623 13.1
BHC 12,853 25.5
BBG 689 1.4
SCB 462 0.9
MBG 881 1.7
Total 50,432 100.0
An additional ¢5.1 billion of NPAs was transferred to NPART from Ghana Cooperative Bank in 1994. Source : NPART (1991, p.24; and 1994, p.15)
56
By the end of 1983, the BHC and NIB had arrears rates of around 85% and 52% of
their respective asset portfolios. After making provisions for arrears in 1984, the
NIB recorded a loss which more than wiped out its capital and reserves (World
Bank, 1986, p72-75; National Investment Bank, 1991, appendix 6). The NIB and
BHC each received C880 million from the BOG in the form of equity and loans in
1983/84 (World Bank, 1986, pp74-75). Bank of Credit and Commerce, which also
had foreign ownership, did suffer from financial distress in 1991
3.2.4 Foreign Banks
The banks with foreign equity participation (Barclays, SCB and MBG) avoided
incurring significant levels of loan losses and were generally profitable.13 Despite
the government equity stakes in these banks and the credit directives issued by the
BOG, they were able to resist most of the pressure to extend credit to unbankable
borrowers. They maintained conservative lending policies with loan applications
evaluated according to strict commercial criteria. Foreign ownership appears to
have provided some protection against government interference in lending
decisions which was so pervasive in the public sector banks. Although the foreign
banks had to comply with credit guidelines, they were able to identify the more
creditworthy borrowers within the priority sectors to lend to; usually the larger
established private sector companies which had a wide range of business activities
in different industries.
Where loans were made to riskier sectors such as agriculture, Barclays and SCB
protected their balance sheets by using BOG credit guarantees. In addition the
SOEs - a major source of bad debts - were given instructions to bank with GCB,
thereby allowing the foreign banks to avoid this sector.
57
3.3 Financial Sector Adjustment Programme (FINSAP)
The comprehensive economic adjustment program which embodied the financial
sector reform started in April 1983 following years of continuous decline in
economic performance. The first phase of the Economic Recovery Program (ERP)
dated from 1983 to 1986 and focused on stabilization measures. The policies
implemented include currency devaluation, tighter fiscal management, and
liberalization of prices including interest rates.
Financial sector reforms have been implemented since the late 1980s as part of the
ongoing Economic Recovery Programme (ERP). They began with the partial
liberalisation of interest rates in 1987 and removal of sectoral credit ceilings in the
following year. This was accompanied by liberalisation of access to foreign
exchange and the licensing of foreign exchange bureaux. In 1989 the FINSAP was
begun, supported by a financial sector adjustment credit (FSAC) from the World
Bank.
The objectives of the FINSAP, inter alia, were to address the institutional
deficiencies of the financial system, in particular by restructuring distressed banks,
reforming prudential legislation and the supervisory system, permitting new entry
into financial markets by public and private sector FIs, and developing money and
capital markets.
Further liberalisation of financial markets took place in 1992 with the adoption of
indirect instruments of monetary control which entailed the introduction of market
determined Treasury bill rates. Since 1994 a second phase of the FINSAP has been
underway, major objectives of which are the privatisation of public sector banks
and development of non bank financial institutions (NBFIs) to fill the gaps in the
financial markets not served by the banks. The following sections discuss the
58
progress, achievements and limitations of the three components of the FINSAP
which most directly affect the banks; bank restructuring, reforms to the prudential
system and the liberalisation of financial markets.
3.3.1 Restructuring the Public Sector Banks
The restructuring of the public sector banks began in 1989, and involved balance
sheet restructuring and reforms to their management and operating procedures.
Balance sheet restructuring was necessary because the banks were insolvent and the
magnitude of their NPAs was too large for them to be able to restore adequate
levels of capitalisation from future profits. Hence recapitalisation from public funds
was necessary. NPAs amounting to C62 billion ($170 million or 4.4% of 1989
GDP) were removed from the banks’ balance sheets and replaced with BOG bonds
or offset against debts owed to the government or the BOG in 1990/91. A
specialised government agency - the Non Performing Assets Recovery Trust
(NPART) - was set up to take over the NPAs and attempt to recover as 11 many of
them as possible.14 NPART received C50.4 billion of NPAs in 1991 and had
recovered C14.1 billion by the end of 1994 (NPART, 1994, p6). A further C5.1
billion of NPAs were transferred to NPART from the Ghana Cooperative Bank in
1994. In addition the BOG assumed responsibility for some of the foreign currency
liabilities of the DFIs and the Social Security Bank (now SG-SSB). The
replacement of NPAs in the banks’ balance sheets enabled all but one of the public
sector banks to meet, by the end of 1990, the minimum capital adequacy
requirement of 6% of adjusted assets prescribed in the 1989 Banking Law. Not all
of the banks’ NPAs were transferred to NPART. Some of those regarded as
unrecoverable, especially small loans to farmers, were not transferred. The banks
were given bonds with maturities of two-five years yielding interest rates of
59
between 7% and 12%. They were subsequently rolled over at rates of 15% (World
Bank, 1994, p56). The exception was the Ghana Cooperative Bank.
In addition to recapitalisation it was necessary to reform the management and
operating procedures of the banks to prevent bad debts from recurring, and to
reduce operating costs. New boards of directors and executives were appointed to
the public sector banks in 1990, and turnaround plans formulated for each of the
banks. Technical assistance was provided through twinning arrangements with
foreign banks such as the State Bank of India. The restructuring involved the
overhaul of credit policies and strengthening of credit appraisal, loan monitoring
and loan recovery systems, areas which had been particularly weak prior to the
reforms. Internal controls, inspection and audit were improved and budgetary and
performance appraisal systems were introduced. Staff training programmes were
enhanced.
To cut costs, staffing levels were reduced by 38% between 1988 and 1992, and
some bank branches were closed (World Bank, 1994, p57; National Investment
Bank, 1991; interviews in Accra, 1995 & 1996).
The Social Security Bank (SG-SSB) now concentrates on commercial banking and
no longer undertakes equity investments in new ventures: such investments were
the source of many of its NPAs prior to the restructuring. However the GCB has
been pressured by the government to continue financing some of the larger SOEs
(interviews in Accra, 1995).
60
A further safeguard against political interference in banks would be their
privatisation, the first stage of which began in 1995 when the government sold part
of its equity stake in the Social Security Bank (SG-SSB) to the public and then sold
30% of its shares in GCB in 1996. There were plans for the divestiture of
government equity in the DFIs but up to date that has not materialised.
In the sixteen years since the restructuring exercise began the financial performance
of the public sector banks has been reasonably good, with the exception of the
Ghana Cooperative Bank and Bank for Housing and Construction which were still
insolvent from 1995 and were closed down in 2000. Banks in Ghana have
generated profits, their rates of return to capital have exceeded inflation on average
during 1991-95, they have built up their capital and reserves, have been able to
meet the minimum capital adequacy ratios imposed by the 1989 Banking Law, and
have generally been highly liquid (see table 3.5). The banks are however still
afflicted by significant levels of NPAs, albeit not at the levels which prevailed prior
to the restructuring, even though the share of loans in their asset portfolios is low.
The GCB made annual provisions for bad and doubtful debts, out of earnings,
equivalent to almost 14% of its total loans during 1991-95, while the SSB, ADB
and NIB made provisions averaging around 5% of their loans.
The financial position of the GCB must still be a cause for some concern. It
suffered a sharp drop in shareholder funds, in loans and advances and in total assets
in 1994, for reasons which are not transparent because it published no annual report
for that year or for 1995, and its capital adequacy ratio declined steeply in 1995. As
noted above, it has had to make extensive provisions (provisions and interest in
suspense amounted to 43% of its outstanding loans and advances in 1995) which
61
indicates that a large share of its loan portfolio is nonperforming. It experienced
liquidity shortages in late 1993/early 1994, although it claimed this was not its fault.
Since the restructuring exercise began the banks have done very little lending: most
of their assets have been held as liquid assets, primarily government and BOG
securities, which since the introduction of the TB auction have provided a
remunerative and safe source of income.
The average ratio of loans to total assets of the five public sector banks in table 3.5
was only 22% during 1991-95. The low level of lending is only partly attributable
to the high liquid asset ratios imposed by the BOG. Bankers interviewed in 1995/96
conceded that creditworthy borrowers were very scarce and that they would be
reluctant to increase lending even if reserve ratios were lower, especially in view of
their past experience of bad debts.
From the point of view of asset management, restoring financial viability to the
public sector banks has been relatively straightforward. Banks have been able to
avoid the much more difficult task of building up an income generating loan
portfolio which would have necessitated them identifying and servicing
commercially viable and creditworthy business projects, or at least borrowers with
adequate security. While the restructuring has enabled the banks to stop making bad
loans, it is not yet clear that it has enabled them to make good loans especially
during 1999 to 2000. This is due to the macroeconomic environment (high
inflation, high interest rates and depreciation of the Cedi). Banks became interested
in Government T-bill instruments. The trend is gradually decline since 2001 due to
the stability in the economy. The banks will then have to expand their lending to the
62
private sector or to SOEs. Whether they have been able to develop the capacity to
undertake commercially viable lending will indicate how successful the
restructuring of the banks has actually been.
Table 3.4: Public Sector Banks after Restructuring - Selected Financial Ratios; Averages 1991-1995 (%) GCB SSB ADB NIB1 BHC2
Loans/Total Assets 8.3 14.6 33 27.8 23.8
Provisions(charges during year)/loans 13.9 5.3^ 4.5 6.6 na
Profit before Tax/Total Assets 5.1 7.9 7.9 8.3 6.3
Profit before Tax/Shareholders Funds 39.6 71 51.6 28 43.8
Capital Adequacy3 6.8 22.6 17.9 29.6 12.8
Notes:
^ :1993-1995 (data on provisions not published in 1991 & 1992 Accounts
1 : 1991-1994
2 : 1992-1995
3 : 1995 – the minimum capital adequacy ratio was 6%
Profits are derived after making provisions for bad and doubtful loans
Sources : GCB, SSB, ADB, NIB and BHC Annual Reports and Accounts
3.3.2 Reforms to the Prudential System
The reforms to the prudential system entailed revisions to the banking legislation
with the enactment of a new Banking Act in 1989 and an NBFI Act in 1993 (NBFIs
had not previously been covered by financial legislation), the introduction of
standardised reporting and accounting procedures, and the strengthening of
supervisory capacities in the BOG.
The 1989 Banking Law initially imposed minimum paid up capital requirements for
Ghanaian and foreign owned commercial banks of GHC200 million and GHC0.5
billion respectively, and GHC1 billion for development banks providing medium
63
and long term finance for trade and industry. Currently the figure has been revised
to GHC70billion for universal banking business and GHC25 billion for
Commercial banking business. The BOG has the authority to amend the capital
requirements. An upward revision of the capital requirements has become
increasingly urgent in view of the high rates of inflation in the 1990s. The Banking
Law initially sets a minimum capital adequacy ratio of 6% of adjusted risk assets
and requires banks to maintain reserve funds with transfers out of annual profits and
currently the capital adequacy ratio has been reviewed to 10%. The Law also gives
the BOG the authority to prescribe minimum liquid asset ratios.
The C200 million required to open a locally owned commercial bank was
equivalent to $1 million in 1989 but this had fallen to only $117,000 by mid 1996.
The capital adequacy provisions differ in two respects from those set out in the
Basle accords. The required minimum is lower: 6% against 8% in the Basle
accords. However the adjusted asset base which forms the denominator for the
capital adequacy requirement is larger under the Ghanaian Banking Law than it
would be under the Basle accords, mainly because the Ghanaian schedule
recognises only two classes of assets (assets given a risk weighting of 100% and
those regarded as riskless) rather than the five classes of assets in the Basle
accords. Assets which under the Basle accords attract a weighting of less than
100% (e.g. mortgages) are given a 100% weighting under the Ghanaian Banking
Law, and hence are required to be supported by a larger amount of capital in the
latter. The main use of the liquidity ratios is for monetary policy rather than
prudential purposes.
The Banking Law stipulates exposure limits for secured credits or guarantees to a
single customer (except for other banks) of 25% of the bank’s net worth, and
64
unsecured credits or guarantees of 10% of net worth. To restrict insider lending,
exposure to customers with links to the bank’s own directors is limited to a
maximum of 2% of net worth for secured facilities and 2/3% of net worth for
unsecured facilities. Banks cannot advance credit against the security of their own
shares or directly engage in non banking business, and the Banking Law restricts
equity investments and loans which banks can extend to subsidiary companies.
However the Law does not set out limits on a bank’s foreign currency exposures.
The Banking Law gives the BOG authority to take action against a bank which it
believes may be unable to meet its obligations to depositors, or is not acting in the
best interests of depositors and creditors. Action available to the BOG includes
prohibiting acceptance of fresh deposits, assuming control of the bank or revoking
the bank’s license.
A standardised accounting system for the banks, which includes explicit criteria for
the classification of loans, provisioning for non-performing assets and the non-
accrual of unpaid income, has also been introduced. To facilitate offsite
supervision, banks are required to submit, to the BOG, a variety of statistical data at
regular intervals, including data on large exposures, non-performing loans and
connected lending. The banks are generally complying with the reporting
requirements, although reports are not always submitted on time. The Bank
Supervision Department (BSD) of the BOG has been strengthened with staffing
levels more than doubled to over 80 and supervisory skills upgraded through
training. Regular on site examinations are now taking place in line with the
requirements of the Banking Law which stipulates that the BOG must examine each
bank at least once a year. Bank examinations are able to investigate the accuracy of
65
the banks’ reports to the BOG, including the veracity of their loan classification.
Supervisors claim that they are under no government pressure to regulate the
government owned banks less stringently. The new Bank of Ghana law gives BOG
that independence. While the reforms are likely to have considerably improved
bank regulation and supervision in Ghana, how effective the prudential system has
become with regards to the closure of BHC and Coop Bank in 2000 is subject to
debate.
The banking system has been relatively easy to supervise during the 1990s for two
reasons:
First, because of the very high reserve requirements and the availability of high
yielding government and BOG securities, all of the banks have adopted
conservative asset management with lending and other risk assets forming a small
share of their total portfolios (loans amounted to only 20% of the banks’ total assets
in 1994). As such the scope for imprudent banking behaviour has been limited.
Second, the numbers of banks which the BOG has had to supervise has not been
large: during 1991-1994 there were only 14 banks operating in Ghana and currently
we have 21 banks. Hence supervisory resources were not dissipated among
numerous banks.
The regulators have not been faced with a rapid expansion of small local private
sector banks, as occurred in Kenya, Nigeria and Zambia, which, given the
experience in these countries, would have been more vulnerable to financial distress
and would have required intensive supervision.
66
The financial fragility in the banking system has increased in the late 1990s and
early 2000s, for two reasons. First, new entrants into banking markets, the growth
of NBFIs, and the privatisation of public sector banks are likely to increase
competition and squeeze interest rate, and hence profit, margins. Second, decline in
interest rates on government securities, due to the improvement in the fiscal
position, now the banks hold a larger share of risk assets in their portfolios in order
to maintain earnings. Most of the prime borrowers in the economy are likely to
bank with the well established banks, especially those with strong foreign
connections, leaving the new entrants among the banks and NBFIs, and possibly the
weaker public sector banks, to service the least creditworthy segments of the credit
market, as has happened in other countries in Africa such as Kenya. The challenges
facing the regulators will intensify as a consequence.
Excluding the banks participating in the restructuring exercise, there have been
three cases of distress among FIs during the 1990s. The Bank for Credit and
Commerce (the Ghanaian subsidiary of BCCI which was closed down by regulators
in the UK and USA in 1991) became technically insolvent since 1991 as a
consequence of incurring a large foreign exchange liability, and was managed
under BOG supervision for some time has been closed down. The local subsidiary
of Meridien BIAO was closed in 1995 after incurring a large foreign exchange
exposure to its parent bank (similar foreign exchange exposures to the parent bank
were incurred by Meridien BIAO subsidiaries in other African countries such as
Kenya, Zambia and Tanzania). The bank was put into liquidation in April 1995.
Meridien was recapitalised by local shareholders, SSNIT and the Ghana
Reinsurance Organisation, and reopened under the name of The Trust Bank.
The authority of the BOG to control Meridien’s imprudent foreign exchange
exposures may have been impeded because the 1989 Banking Law does not impose
67
specific limits on foreign exchange exposures, but the main problem facing the
regulators was probably their ability to detect and prevent the exposure before it
was too late. The BOG has set up a unit to monitor foreign exposures in the banking
system and is considering issuing regulations to the banks limiting such exposures.
The third case of FI distress occurred in 1996 when Securities Discount Company
Investments (SDCI) was put into liquidation because of the non servicing of many
of its loans. SDCI was a subsidiary of the Securities Discount Company (SDC), a
discount house set up in 1991, with equity participation from SSNIT, the
International Finance Corporation, GCB and two of the merchant banks established
in Ghana in the late 1980s; CAL and Ecobank. It was alleged that SDCI had not
received a license to operate as a finance house under the 1993 NBFI Law (and
therefore was not licensed to extend loans), had violated the exposure limits of the
NBFI Law, had extended credit to one of its directors, and that about half of its loan
portfolio had been extended without any, or adequate, security (Public Agenda, 18-
24/3/96 and 24-30/6/96). The BOG had been unable to prevent SDCI’s
infringements of the NBFI Law, partly because its NBFI supervisory capacities
were not fully operational when the infringements took place and partly because
SDCI’s activities had begun in 1992, before the NBFI Law came into force.
The BCC, Meridien BIAO and SDCI and the close down of Bank for Housing and
Construction and Cooperative Bank in 2000 cases point to what may be a
significant change in the nature of potential threats to the financial soundness of FIs
in Ghana. Whereas the main cause of bank distress in the controlled financial
system existing before the financial sector reforms was political interference in
government controlled banks, in a liberalised, predominantly private sector owned
68
financial system, foreign exchange exposures and insider lending may prove to be
more important.
3.3.3 Financial Liberalisation
Since 1987 financial markets have been progressively liberalised in Ghana.
Liberalisation has entailed the removal of controls on interest rates and the sectoral
composition of bank lending, and the introduction of market based instruments of
monetary control. New FIs, including several merchant banks with private sector
participation, have been licensed and the latest phase of liberalisation involves the
partial privatisation of government owned banks. This section outlines the main
components of financial liberalisation in Ghana and evaluates their impact on
banking markets. We discuss whether liberalisation has led to positive real interest
rates, boosted deposit mobilisation, enhanced the efficiency of loan allocation,
stimulated competition and improved services.
3.3.3.1 Liberalisation of Interest Rates and Credit Directives
Interest rates were partially liberalised in 1987 with the removal of maximum
lending rates and minimum time deposit rates. Minimum savings deposit rates were
removed in the following year as were all the sectoral credit guidelines with the
exception of the stipulation that at least 20% of each banks’ loan portfolio be
allocated to agriculture. This was removed in 1990. Controls on bank charges and
fees were also abolished in 1990. The bank specific credit ceilings, which had been
the main instrument of monetary control employed during the ERP, were removed
in 1992, and replaced with an indirect market based system of monetary control
involving the weekly auctioning of Treasury bills and other government and BOG
securities, backed up with statutory cash reserve and liquid asset requirements
69
(Alexander et al, 1995, pp47-49).21 Hence by the early 1990s banks were free to
price deposits and loans and to allocate loans according to market criteria, although
the very high reserve ratios imposed by the BOG were a major constraint on the
volume of credit they were able to extend until July 2005 where the secondary
reserve has been reduced from 35% to 15%.
3.3.3.2 New Entry into Financial Markets
There have been several new entrants into banking markets since the reforms
began. Two merchant banks - Continental Acceptances (CAL) and Ecobank - began
operations in 1990: both are joint ventures involving local public sector
shareholders and foreign shareholders. A foreign commercial bank - Meridien Bank
BIAO - was set up in 1992 with a minority local shareholding by the Social
Security and National Insurance Trust (SSNIT). Two more merchant banks
commenced operations in 1995: First Atlantic and Metropolitan and Allied.
Recently four Nigerian banks have entered into the industry and it is expected that
the competition is going to be intensified. The number of banks has increased from
11 as at 1989 to 21.
In addition to the new entry into banking markets around 20 NBFIs, including
leasing companies, finance houses, building societies and savings and loan
companies, have been established during the 1990s. Many of these NBFIs accept
deposits and extend credit, and therefore provide some competition for the services
offered by the banks.
70
3.3.3.3 Real Interest Rates and Deposit Mobilisation
Interest rate liberalisation has not had a marked impact on the level of real deposit
rates, in part because administered nominal rates had already been raised in 1984 by
the BOG in an effort to stimulate financial savings. There have been substantial
variations in the level of real interest rates since the late 1980s, reflecting
fluctuations in inflation rates and the considerable contemporaneous differences
between the nominal rates offered on different classes of bank deposits since
interest rates were liberalised. High rates of inflation have impeded the attainment
of positive real deposit rates. When inflation rates have fallen to around 10%, as in
1992, real deposit rates have been positive.
Table 3. 5: Nominal and Real Deposits Rates (%) Year Inflation Nominal Deposit Rates Real Deposit Rates
Lowest Highest Lowest Highest
1989 25.2 15 21 -10.2 -4.2
1990 37.2 14 24 -23.2 -13.2
1991 18.0 10.6 25.2 -7.4 7.2
1992 10.1 11 24 0.9 13.9
1993 25.0 15 32 -10.0 7.0
1994 24.9 13.8 31 -11.1 6.1
1995 58.50 21.5 37 -37.0 -21.5
The lowest interest rate is the lowest rate offered on savings deposits. The lowest rate is the highest rate offered on fixed deposits. Source: Bank of Ghana (various issues)
But when inflation has been higher, as in 1987-91 and 1993-95 and 1999 and 2000,
the nominal interest rates paid on savings deposits and the lowest rates paid on
fixed deposits have generally been well below the prevailing inflation rates.
Consequently bank deposits have not offered very attractive returns to most savers.
Not surprisingly there has been only a very limited degree of financial deepening in
71
the banking system since the reforms began. Bank deposits increased from 10.4%
of GDP in 1986 to 12.8% of GDP in 1994. Currently it is picking up.
3.3.3.4 Credit Allocation
The liberalisation of controls over interest rates and credit allocation, together with
the adoption of a more commercially oriented approach to lending by the public
sector banks should enhance the efficiency of credit allocation: ie enable banks to
direct credit towards those borrowers capable of generating the highest rates of
return. It is likely that credit allocation has improved – currently the improvements
in the level of banks’ NPAs suggests that banks are generally avoiding lending to
commercially unviable projects -although this is probably due more to the
institutional reforms undertaken by the public sector banks than by liberalisation of
administrative controls.
The main constraint to an increase in the efficiency of credit allocation by the banks
has been macroeconomic instability particularly in the 1999 and 2000, as in several
other African countries undertaking financial sector reforms. Large fiscal deficits,
financed partly through domestic borrowing, and unsterilised balance of payments
surpluses have led to relatively high and variable rates of inflation and high nominal
interest rates in the 1990s.
Although ex post real lending rates have not always been very high (and sometimes
been negative), the combination of nominal lending rates of up to 39% and high but
unpredictable inflation entails considerable risk for borrowers. Consequently loan
demand has been depressed while the banks have been reluctant to expand their
lending, instead investing in government and BOG securities. Government
72
securities have offered the banks returns which have often been comparable to
prevailing lending rates, without the risk involved in lending to the private sector.
Bank lending has also been constrained by the high reserve ratios imposed by the
BOG in an attempt to restrain monetary growth. Bank lending to the private sector
has remained at very low levels since the financial sector reforms began, amounting
to only 5.3% of GDP in 1994 (table 3.2). The private sector has to a large extent
been crowded out of credit markets by the public sector’s borrowing requirement.
3.3.3.5 Competition and the Efficiency of Banking Services
Liberalisation could stimulate greater competition in banking markets through
several channels. These include the new entry into banking markets outlined above,
the diversification of the operations of the DFIs away from purely specialised
functions, the universal banking business, the removal of interest rate controls and
credit ceilings, which should allow banks greater freedom to compete for
customers, and the privatisation of government banks; private sector banks might
be expected to compete more aggressively against each other than banks owned by
the public sector. New entry has brought about a small reduction in market
concentration in the banking industry. The share of the largest four banks in total
bank deposits fell from 76% in 1988 to 70% in 1994 and currently stands about
60%. However, the industry remains highly weak oligopolistic. Until 2000,
competition was limited to the segments of the deposit and credit markets involving
corporate and institutional customers: most of the new entrants have been in
merchant banking rather than retail banking and the established commercial banks
have reduced their retail branch networks. Liberalisation had not yet had a major
impact on innovation in banking markets or the quality of services offered to the
public. Until recently in the 2000s, there had been very little innovation in terms of
73
the range of instruments and services provided. Only very basic savings and lending
instruments are available from the banks. Interest bearing chequeing accounts are
generally only available to customers with very large deposits (World Bank, 1994,
p61). However the NBFIs have introduced some new credit instruments, such as
leases.
A large volume of money is remitted to Ghana by Ghanaians working abroad, and
now the banks have provided adequate facilities to attract this business. Transferring
money from abroad through the banks is now on the increase through Western
Union, Vigo and Moneygram. Until recently the failure of financial liberalisation to
stimulate greater improvements in the range and quality of retail banking services
requires some explanation. It may be attributable to the lack of competitive
pressures on the banks which have been able to generate profits during the 1990s,
mainly from investing in securities, without having to compete vigorously for either
deposits or borrowers. It is also possible that the very low usage of the banking
system by the public (as indicated by the lack of financial depth) makes the
introduction of innovative retail services uneconomical. In turn the public are
deterred from using the banks, partly because services are poor, but also because
holding bank deposits is unattractive given the high rates of inflation. It is likely
that the current macro economic stability will enhance greater competition and
improve retail banking business.
In summary, financial liberalisation has been pursued progressively in Ghana
through the following:
Abolition of credit controls
Removal of ceilings on interest rates
74
Liberalization of the exchange rate of the cedi
Gradual privatization of government interest in the banking sector
Improvement of the legal framework for the governing of the financial
sector
Bank of Ghana act giving independence to the Central Bank
Creation of the Monetary Policy Committee and the determination of the
prime rate to serve as a signal rate to the lending institutions
Sovereign credit rating by S & P(B+) and Fitch Ratings (B+)
Bills in waiting to boost the financial sector include Exchange Control Act,
Credit Reporting Bill and the Anti-Money Laundering Bill
Establishment of the Ghana Stock Exchange and subsequently the Securities
Exchange Commission
Mutual Fund Bill and Long Term Savings Bill introduced
Concept of positioning Ghana as a financial hub in the sub-region mooted
3.4 The Impact of Reforms on Financial Sector Performance
As we have indicated, the primary object of financial sector reforms was to improve
on financial service delivery in African countries and facilitate the development of
monetary policy. However, we have seen that the outcomes were often far less
successful than anticipated. We discuss here the extent to which these objectives
were achieved in terms of sector performance. The situation can be summed up as
follows: financial product development continues to be slow and narrow in many
countries and the delivery of such products is unsatisfactory; savings mobilization
efforts have yielded inconsistent outcomes; credit delivery remains the archilles
heel of financial systems; failing banks and banks in distress continue to be
common.
75
While there may be some diversity in the outcomes of the restructuring efforts in
various economies, the differences are not very significant. Essentially, the
functions of savings mobilization and financial intermediation have not fully
recovered since reforms were initiated (Nissanke and Aryeetey 1998; Haque,
Hauswal, and Senbet 1997). Nissanke and Aryeetey suggest that widespread risk
continues to be a major feature of the markets; the infrastructure for financial
service delivery has not significantly improved; and the environment for regulation
and supervision remains inadequate. Even in Ghana and Malawi, where reforms
have been relatively orderly, most banking institutions have not developed the
capacity of risk-management and still operate with inadequate information base.
We first look at the financial deepening.
3.4.1 Financial Deepening
Financial deepening measures the development of the financial sector and how it is
able to mobilise funds within the economy. It also reflects the extent to which the
financial sector is liberalised and the degree to which all forms of government-
imposed restrictions have removed. In a developed or liberalised financial system,
the banks will be able to offer attractive interest rates that will attract borrowers.
Financial deepening can only be improved when there is credible and sustained
macroeconomic stability since this creates increased demand for money. In most
Asian countries where financial sector reforms have taken place (Indonesia, for
example), the ratio of broad money to GDP as a measure of financial deepening
rose significantly from 9% in 1983 to over 40% in 1991. In African, and in Ghana
where securities market are not well developed, governments borrow from banks to
finance deficits, thereby reducing the credit available to the private sector and
constraining its level of activity.
76
There has been an improvement in financial deepening in Ghana since 2001. This is
largely due to the improvement in the macroeconomic performance of the
economy. In the early years of FINSAP and in the 1990s, the M2/GDP ratio
averaged around 19% which was far below the Africa average of 22%. This was
largely due to the fiscal slippages. In the four countries that Nissanke and Aryeetey
(1998) studied, they observed that expected positive effects from liberalization in
savings mobilization and credit allocation had been slow to emerge. Both the
M2/GDP ratio and the private credit/GDP ratio to measure financial deepening
showed clear upward trend in any of those countries. In Nigeria, both indicators
worsened considerably in the reform period. Indeed, in most countries, credit as a
proportion of GDP declined in the reform years, even if the share of credit to the
private sector rose. Among the better performing African nations are Kenya and
Zimbabwe which had credit/GDP ratios that exceeded 30 percent in 1996. The low
credit GDP ratios for the African countries may be compared to 50 percent in
Indonesia and 75 percent in Malaysia at that time. There has not yet been a clear
upward trend in the indicators of financial deepening since the implementation of
liberalization measures and bank restructuring to restore banks’ commercial
viability.
Although the public sector’s share in domestic credit declined in many countries,
government and public enterprises for long continued to receive the largest
proportion of bank credit. In Ghana, for example, despite a reduction in the claims
of commercial banks on the government and the public sector, lending to the public
sector has remained very important to this day (See Table 3.4). The sharp drop in
1996 and 2002-2003 for government credit was due to a special effort to control
inflation by enhancing private sector production following major criticisms of
77
government, but this went up again in 1997 -2000 due to macroeconomic
instability.
Table 3.6: Money and Quasi Money (M2) as % of GDP
1980 1990 1996
Benin 17 24 23
Botswana 26 26 25
Cameroon 21 23 13
Cote d’Ivoire 27 29 27
Ethiopia .. 37 40
Ghana 16 13 15
Kenya 30 27 41
Malawi 18 18 15
Mozambique .. 40 32
Nigeria 24 19 17
Senegal 27 23 20
South Africa 50 54 54
Tanzania .. 19 23
Uganda 13 6 10
Zambia 28 20 16
Zimbabwe 31 28 26
Source: World Bank, 1998 World Development Indicators, Washington DC.
78
Table 3.7 : Financial Deepening (1996-2004) Year-
End Nominal Nominal Currency
Private
Sector Nominal M2+/ M1+/ Cu/GDP Cu/M2+ PSC/GDP
M2+
(¢bn)
M1+
(¢bn) Cu (¢bn)
Credit
(¢bn)
GDP
(¢bn) GDP GDP
1996 1,785 1,215 724 680 9,167 19% 13% 8% 41% 7%
1997 2,506 1,766 982 1,070 13,863 18% 13% 7% 39% 8%
1998 3,903 2,070 1,084 1,639 17,157 23% 12% 6% 28% 10%
1999 4,897 2,193 1,272 2,466 20,580 24% 11% 6% 26% 12%
2000 7,248 3,517 2,636 3,826 27,153 27% 13% 10% 36% 14%
2001 10,248 5,122 3,090 4,472 38,014 27% 13% 8% 30% 12%
2002 15,368 8,218 4,672 5,864 47,764 32% 17% 10% 30% 12%
2003 21,174 11,373 6,338 8,052 65,262 32% 17% 10% 30% 12%
2004 26,686 14,603 7,303 9,778 78,650 34% 19% 9% 27% 12%
Source: Bank of Ghana Statistical Bulletin Table 3.8: Credit to Private Sector (% of GDP)
Source: World Bank, 1998 World Development Indicators on CD-ROM, Washington DC
1980 1990 1996
Benin 29 20 9
Botswana 11 10 11
Cameroon 30 27 8
Cote d’Ivoire 41 36 20
Ethiopia .. 24 22
Ghana 2 5 7
Kenya 29 33 35
Malawi 21 12 4
Mozambique .. 32 18
Nigeria 12 9 11
Senegal 42 27 16
South Africa 60 85 137
Tanzania .. 16 3
Uganda 4 .. 5
Zambia 20 9 9
Zimbabwe 33 30 35
79
Table 3.9: Distribution of Total Domestic Credit in Ghana (%) Year Central Government Public Enterprise Private Sector
1986 64.2 16.9 15.5
1987 76.4 9.8 11.4
1988 75.8 4.13 16.9
1989 45.2 16.9 34.1
1990 47.1 11.8 37.4
1991 68.7 12.0 19.3
1992 68.3 10.8 20.7
1923 72.8 8.8 18.4
1994 62.7 14.7 22.6
1995 60.6 12.8 22.6
1996 21.5 16.2 62.3
1997 39.1 6.1 54.8
1998 56.5 5.0 38.5
1999 54.5 6.7 38.8
2000 53.7 11.2 35.2
2001 49 14.4 36.6
2002 45.6 8.3 46.1
2003 32.6 16.7 51.7
2004 33 17.8 49.2
Source: Compiled from Bank of Ghana Data
80
Table 3.10: International Comparison of Selected Banking and Institutional Indicators (In percent, unless otherwise indicated as at 2003)
Ghana Kenya Mozambique Nigeria South
Africa
Tanzania Uganda Zambia SSA
Average
Size of Financial
Intermediaries
Private Credit to GDP 11.8 26.8 16.7 14.4 147.2 4.9 4.0 7.5 15.2
M2 to GDP 19 43.8 5.1 25.8 87.2 18.3 13.0 16.9 24.8
Currency to GDP 10.5 13.2 15.6 10.8 28.4 8.5 8.8 6.4 13.9
Banking Industry
Number of Banks 17 53 10 51 60 29 15 16 -
Net Interest Margin 11.5 5.0 5.9 3.8 5 6.5 11.6 11.4 8.3
Overhead Costs 7.3 3.7 4.5 7.4 3.7 6.7 4.6 11.2 5.7
Foreign bank share (asset) 53 4.8 98 11 0.6 58.7 89.0 66.6 -
Bank concentration (3 banks) 55.0 61.6 76.6 86.5 77 45.8 70.0 81.9 81.0
Non performing loans (share of
total loans) 28.8 41 - 17.3 3.9 12.2 6.5 21.8 -
Capital markets
Stock Market Capitalisation (%
of GDP) 10.1 9.2 - 10.9 77.4 4.3 0.6 6 21.3
Contract enforcement
Number of Procedures 21 25 18 23 16 26 14 1 29
Duration (Number of Days) 90 255 540 730 99 207 127 188 334
Bankruptcy
Time in Years - 4.6 - 1.6 2.0 3.0 2.0 3.7 3.5
Credit Market
Credit Rights Index (0 is
weakest) 1 1 3 1 2 3 1 2 2
Entry Regulations
Number of Procedures 10 11 16 9 9 13 17 6 11
Duration (number of days) 84 61 153 44 38 35 36 40 72
Cost (percent of GNI per
capacity) 111 54 100 92 135 9 199 24 255
Source: IMF, International Finance Statistics; Bank Scope; World Bank, World Development Indicators; Doing Business Indicators Database; “Tanzania Financial System Stability Assessment” IMF Staff Country Report No 03/241. Washington D.C IMF (2003). Banking Statistics and Capital market indicators are for 2001. All institutional indicators are for 2003.
81
3.4.2 Macroeconomic Management
The expected impact of a liberal interest rate regime on the monetary situation was
seldom achieved as the ability of the monetary authorities to achieve set targets was
often compromised by an ineffective broader policy environment (Roe and Sowa
1997; Nissanke and Aryeetey 1998). In the presence of shallow financial markets
and a poor development of money markets, rising interest rates often quickly led to
a credit crunch, and in many instances to considerable excess liquidity, i.e.,
situations in which banks voluntarily increased their holdings of liquid assets on a
large scale. Indirect monetary management has been difficult in many countries,
with some improvements only being observed lately. Authorities showed
considerable difficulty in the handling of inflation in the reform years.
However, it is apparent that an unstable macroeconomic environment would not be
very helpful to financial sector reforms and indirect monetary management. In a
number of countries, the macroeconomic environment has remained quite fragile.
This continues because various external shocks and political pressures often lead to
a breakdown of fiscal and monetary discipline.
Unable to restrain inflation, which until recently exceeded 40 percent in 2000
before it dropped to 11.8% in 2004, achieving positive real interest rates has been
difficult, despite rising nominal rates. The rising interest rates have not led a
marked growth in deposits in countries with considerable macroeconomic
instability, such as Ghana. Indeed, it is the fiscal imperatives that have often created
difficulties for the monetary and financial sector.
82
3.4.3 Interest Rates and Spreads
The financial sector reforms and liberalization sometimes yielded a desired
outcome – the emergence of positive real interest rates (as expected). However, the
desired results of increased investments and savings have not been in abundance in
Ghana. Indeed, the financial systems are characterized by exorbitantly high real
rates of interest and shrinkage of commercial lending by banks, in favour of banks
holdings of government securities. In addition, the lending – savings margins have
been dramatically high. The prevalence of exorbitantly high real lending rates and
continuing increase in the lending-deposit rate margins is particularly disappointing
(See Table 2.6).
Under the reform programs, an initial increase in the spread between lending and
deposit rates was anticipated. In other words, banks needed time to reshape their
cost structures within the changing environment. The spread was, however,
expected to narrow as more efficient business practices were adopted following
increasing competition and as credit demand stabilized. But in most countries,
lending rates did not only rise sharply during the reform years; they rose much
faster than deposit rates. Indeed, more than a decade after reforms were started, the
spread between the two continue to widen in many countries. The issue of steady
rises in lending rates under different monetary and fiscal regimes continues to be
one of the most interesting outcomes of financial sector reforms in Africa.
83
Table 3.11a: Interest Rate Spread (lending rate minus deposit rate) 1980 1990 1996
Benin 8 9 .. Botswana 3 2 4
Cameroon 6 11 ..
Cote d’Ivoire 8 9 ..
Ethiopia .. 4 5
Ghana 8 9 10
Kenya 5 5 16
Malawi 9 9 19
Nigeria 3 6 ..
Senegal 8 9 ..
South Africa 4 2 5
Tanzania 8 .. 24
Uganda 4 7 10
Zambia 3 9 12
Zimbabwe 14 3 13
Source: World Bank, 1998 World Development Indicators, Washington DC.
Table 3.11b : Selected Commercial Bank Interest Rates, 2000 and 2004 Deposit Rate Lending Rate Spread
2000 2004 2000 2004 2000 2004
Gabon 5.0 5.0 22.0 18.0 17.0 13.0
Ghana 16.8 7.5 47.0 28.8 30.2 21.3
Kenya 8.1 2.4 22.3 12.5 14.2 10.1
Mauritius 9.6 8.2 20.8 21.0 11.2 12.8
Mozambique 9.7 9.9 19.0 19.2 9.3 9.3
Nigeria* 11.7 13.7 21.3 19.2 9.6 5.5
Tanzania* 7.4 4.2 21.6 13.9 14.2 9.7
Uganda 9.8 7.7 22.9 20.6 13.1 12.9
Zambia 20.2 11.5 38.8 30.7 18.6 19.2
Source : International Financial Statistics, IMF* For Nigeria and Tanzania, the central bank prime lending rate is shown
84
Table 3.11c : Decomposition of Interest Spread in Ghana Dec-04 Dec-03 Dec-02 Dec-01 Dec-00
Interest Income 29.35 30.94 33.36 42.79 35.04
Cost of Funds 5.17 6.34 5.89 11.32 9.84
Total Spread 24.18 24.60 27.47 31.47 25.20
Overhead Cost 8.93 7.86 9.95 7.26 6.05
Loan Loss Provisions 2.93 3.72 4.36 5.86 3.85
Cost of Prim Reserve Requirements 2.90 3.06 3.30 4.23 3.47
Taxation 3.29 3.49 3.45 4.94 4.14
Profit Margin 6.13 6.47 6.41 9.18 7.69
Source : Audited Accounts
3.4.4 Restructuring of Banks and Banks Distress
The balance sheets of many banks saw some growth in shareholders’ funds in the
reform years. This growth in shareholders’ funds reflected the re-capitalization of
those banks. In Ghana, for example, average shareholder capital has been well
above the 5% minimum (but usually below 15%) since 1988. State-owned
development banks have averaged a relatively high 12%, as a result of government
re-capitalization schemes.
The portfolios of banking institutions continue, however, to be dominated by an
extremely high incidence of non-performing loans and excess liquidity. In Nigeria,
while there has been little sign of real progress for deposit mobilization and credit
allocation to productive investment since liberalization measures were first adopted
in 1987, distress among banks has been one of the most severe in the whole region.
Thirty-seven Nigerian banks, accounting for one third of commercial and merchant
banks, were identified as distressed with non-performing assets in 1994. Distress
85
among banks is evidently growing among African banks as evidenced by recent
occurrences among Kenyan commercial banks. In Ghana, even though the World
Bank (1998) has identified as many as three state-owned banks as distressed since
1995, the government has not allowed them to go under after all attempts to
recapitalize them failed. Two of such banks in Ghana were closed down in 2000 as
a result of non-performing loans.
The persistence of these conditions, despite radical changes in the policy
environment, can be explained by constraints that prevent improvement in banks’
operational practice. Operational practice is a function of many parameters, such as
risk-aversion, net worth, asset quality and intermediation efficiency measured in
terms of loan transaction costs. In addition, it is affected by externally imposed
factors, such as a poor information capital base and policy uncertainty and
credibility; and these have not changed much under recent reform programs.
3.4.5 Money and Capital Markets Development
A major reason for the poor functioning of money markets (particularly in the
1990s) is government financing approaches. That practice of governments issuing
large quantities of very high-yielding bills to meet fiscal requirements was seen as a
problem. Indeed, so long as banks have access to inexpensive and unlimited loans
through central bank discount facilities, inter-bank borrowing and lending are
unlikely to be attractive.
On the other hand, the reforms have yielded a positive outcome in terms of growth
of the number of stock markets. There are about sixteen stock markets, and they
have become a basis for the commensurate introduction of Africa–based funds
86
trading in New York and Europe. The stock markets have emerged as a real
potential for integration of Africa into the global economy. However, the markets
are very illiquid and remain the smallest of any region in terms of capitalization,
except South Africa (Senbet 1997). The issue of liquidity and functionality of the
capital markets is not the focus of this work.
S0o far the gains from the reform in Ghana are in terms of releasing more resources
to the private sector, lower rates of inflation and modest improvement in real
interest and rate. The credit for these gains owes much to the consistency in
program implementation since 2001. This ensured a progressive improvement in
the financial and macroeconomic indices. The discipline of government in cutting
down the budget deficit and borrowing less from the financial system also helped.
A clearer picture of the state of the financial system that resulted from the reform
and of its linkage with the real sector will however emerge if the reform is further
implemented with the past zeal and zest.
87
3.5 Environment, Competition and Performance
This section reviews the external environment within which Banks in Ghana
operate. This will be followed by structure, competition and performance.
3.5.1 Competitive Environment
Macro-environmental influences- The PESTEL Framework
This section looks at the macro-environmental influences that might have affected
banks in Ghana. The PESTEL framework which is used in this analysis categorized
Fig 3.1: Macro-environmental influences – the PESTEL
The Banking Industry
Political Government stability Taxation policy Foreign trade regulations Social responsibility Economic Factors
Business cycles GNP trends Interest rates Money supply Inflation Unemployment Disposable income Taxation Policy Foreign trade regulations Social responsibility
Socio-cultural factors Population demographics Income distribution Social mobility Lifestyle changes Attitudes to work and leisure Consumerism Levels of education
Technological Government spending on research Government and industry focus on
technological effort New discoveries/developments Speed of technology transfer Product innovation
Legal Labour Law Bank of Ghana Act Banking Act NBFI Law Securities Industry Law
Environmental Environmental
protection laws Waste disposal Energy consumption
88
environmental influences into six main types: political, economic, social,
technological, environmental and legal.
3.5.1.1 Political
The country has enjoyed stable democracy since 1992 and this is expected
to continue as the government in power is committed to rule of law,
democracy and market based economy.
A vibrant opposition is in parliament and an independent electoral
commission ensures that political parties abide by a code of practice, which
is in consonance with democratic governance.
The judiciary is relatively well respected and independent; its reputation
continues to suffer from the political interference of previous decades.
A vibrant and independent media, which operates freely, is demonstrated by
the sharp increase in the number of both print and electronic media in the
country.
With Ghana being a member of ECOWAS and Mohammed Ibn Chambers
as the organization’s secretary, Ghana will continue to play a leading role in
the regional affairs.
3.5.1.2 Social
The final data from the 2000 population and housing census released in
March 2002 revealed a total population of 18.9 million and a population
growth rate of 2.7% per annum since the last census in 1984.
Data from statistical service shows that poverty declined in the 1990s. Using
an income of $110 per year as a poverty line, the percentage of Ghanaian
population defined as poor declined from almost 52% in 1991-19 to just
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below 40% in 1998-99. The decline was not distributed evenly in terms of
geographical location as the reduction in poverty concentrated in Accra and
forest zones. The regions with the lowest per head are Northern, Upper East
and Upper West.
The country has a large number of unemployed youth especially among
university graduates, a phenomenon that is explained by the non-fit between
skill set and industrial labour requirements.
Health services in Ghana are severely under resourced. According to the
UN; healthcare expenditure was just $51 per head in 2000. There are just six
physicians per 100,000 people and skilled healthcare personnel attended
only 44% of birth. The government estimates that only 45% of the rural
population has access to health services.
The private sector is not growing as fast as expected mainly lack of capital
and competition from global businesses.
Ghanaians are very religious and the government upholds freedom of
worship.
There is existence of HIV/AIDs however not on a scale as of other
countries, but the government is taking the threat posed by the pandemic
seriously and has committed 15% of healthcare budget to it.
3.5.1.3 Economic
The government continues to pursue policies aimed at improving the
macro economic environment with the World Bank having a strong
influence on its programmes. Much progress has often been undone in
the election years when the pressure to spend freely has been too
tempting. These fiscal lapses during election years have caused the
90
government problems that have proved difficult to resolve in subsequent
years particularly during 1996 and 2000 elections. Nonetheless, IMF
programmes have remained in place for most of the past eight years.
Agriculture continues to be the mainstay of the economy, employing
about 60% of the labour force and contributing around 30-40% of GDP.
The agricultural sector is vulnerable to shocks caused by the fluctuations
in world commodity prices and diseases. Attempts to diversify the sector
have yielded minimal results although the potential do exists.
The main challenge for the government in adhering to the GPRS is to
meet the agreed fiscal targets. Since Ghana’s return to multiparty
democracy in 1992, its overall fiscal performance has deteriorated
compared with the late 1980s. In 2000 the budget deficit was equivalent
to 8.5% of GDP, the largest since 1979. The rising deficits were caused
mainly by rapid increases in government spending (particularly ahead of
the election in 2000), on wages and interest on government debt, against
a backdrop of stagnating revenue. The strengthening of the revenue
agencies and HIPC relief helped reduce the fiscal deficit to 5.3% of
GDP in 2002, better than the original budget projection of 6.9% of GDP.
The fiscal deficit is projected at …% of GDP for 2006. It is expected
that by reducing the deficit to this level, the government will be able to
eliminate the need for domestic financing, the stated goal of the budget.
During the latter part of 1990s, the monetary policy followed by the
BoG was aimed at sustaining the declining trend in inflation, which
began in 1996. The bank therefore permitted only moderate growth in
the money supply, which brought year-end inflation to 15.7% in 1998 to
13.8% in 1999. The central bank was also able to slow down monetary
91
growth through the intensification of open market operations, and
complemented this with deposit auctions and the introduction of new
instrument, such as repurchase agreements and swaps. However,
financing the rapidly growing fiscal deficit eroded all the gains achieved
from earlier policies during the fourth quarter of 2000, when a sharp
increase in money supply pushed the year end growth rate of broad
money supply to 38.4%. Monetary policy focused on reducing inflation
and slowing down the depreciation of the cedi in 2001 and 2002, and
open market operations were intensified. This continues because various
external shocks and political pressures often lead to a breakdown of
fiscal and monetary discipline.
Table 3.12: Inflation, Consumer Prices (annual %) 1987 1998 1999 2000 2004
Inflation rate 20.8 15.7 13.8 40.5 11.8
Real GDP Growth 4.2 4.7 4.4 3.7 5.2
Budget Deficit/GDP -8.3 -6.1 -6.6 -7.0 n/a
Depreciation rate 22.7 -4.1 -33.0 -91.5 -2.2
Source: Ministry of Finance
Unable to restrain inflation, which until recently exceeded 40 percent in 2000
before it dropped to 11.8% in 2004, achieving positive real interest rates has been
difficult, despite rising nominal rates. The rising interest rates have not led a
marked growth in deposits in countries with considerable macroeconomic
instability, such as Ghana. Indeed, it is the fiscal imperatives that have often created
difficulties for the monetary and financial sector.
92
The cedi has remained relatively stable against the US dollar (Ghana’s
main trading currency) in the last three years depreciating by about 5%,
in contrast with developments in 2000 when the cedi depreciated sharply
(49%). The rate of the cedi against the pound sterling continues to be
influenced by international GBP/USD cross rates. The strength of the
GBP against the USD has put the depreciation of the cedi against the
GBP at 16%.
Inflation, which was 15.2% in January 2005, peaked at 17.3% in March
due to the impact of increases in fuel prices. But this has assumed a
decline trend hitting 14.8% by the end of 2005 and has hit a single digit
by the end of the first quarter of 2006. The increasing stability of the
exchange rate and tight monetary and fiscal policy has contributed to
this trend in inflation. Inflation is expected remain at a single digit by
the close of 2006. The only uncertainty is the effects of the crude oil
price at the international market and the local deregulation of oil market.
Interest rates have dropped from high figures above 40% in 1990s to
9.68% in the first quarter of 2006.
A rigorous tax regime is currently prevailing. VAT was introduced in
1995 and was pegged at 10%. This has moved up 15%. The
reconstruction levy has reduced from 10% in 2001 to 7.5% in 2003 and
has further dropped to 5.5%. This, in addition to other measures, such as
the enforcement of the withholding tax regulations is meant to improve
tax collection to reduce the fiscal deficit.
93
Government has projected a real GDP growth rate of 6% for 2006. This
may be achieved in view of the current macroeconomic stability.
The government in a move to manage its domestic debt burden
introduced three-year inflation – indexed bond in 2001. This forms part
of the secondary reserve requirements and banks have to compulsorily
invest 15% of their deposits in these bonds. About 90% of these bonds
mature in the last quarter of 2004 and the central bank is still silent on
how it will finance the payment of revaluation gains, which have
accrued over three years.
The bank of Ghana plans has increased the capital adequacy ratio from
the current 6% to 10% and has already increased the minimum capital
requirements for the banks operating in Ghana to GHC70billion (about
US$8million).
The capital market continuous to be starved of Initial Public Offering
(IPO). Only 29 companies are listed on the stock exchange market.
Liquidity has remained extremely low; the volumes traded averaging
only 0.3% of total market capitalization. Most retail investors are
passive and public awareness of the GSE is relatively low. The bond
market is under developed. Activity on the market has slowed down due
largely the weak macroeconomic environment.
The divestiture of state owned corporations is on going albeit at a slower
pace. Key corporations earmarked for divestiture are the State Insurance
Company, which controls 65% of the insurance market, Ghana Oil
Company, a petroleum distribution company that has about 17% market
share. Also stated for divestiture are Ghana Commercial Bank (GCB),
National Investment Bank (NIB), Agricultural Development Bank
94
(ADB), Tema Oil Refinery (TOR), Ghana Water Company, Electricity
Company of Ghana (ECG) and Volta River Authority (VRA).
3.5.1.4 Technology
The technological landscape in Ghana has witnessed tremendous
improvements with the telecom industry being the driving force though still
expensive.
There are six service providers, three of which are mobile phones
companies. Ghana Telecom continuous to expand into other areas of
telecommunications industry.
Internet services providers are mushrooming as well as computer hardware
and software vendors.
All banks use SWIFT technology. VSAT and satellites communications
infrastructure have also been introduced to the market. The National
Communications Authority has been established to regulate the
telecommunication industry.
A national Information Technology Agency is soon to be established to
provide a framework for the development and implementation of
information technology and related activities in Ghana.
3.5.1.5 Environmental
Environmental protection laws have seen some improvement with the
establishment of Environmental Protection Agency
Service provision of electricity is still poor with a lot of power fluctuation
which had adverse effect on industries. There was energy crisis in 1998 as a
result of a fall in the water level from Akosombo Dam. The source of
95
energy in Ghana is hydro and thermal and this not likely to change in the
next decade.
3.5.1.6 Legal and Regulatory Environment
The banking sector is governed by the Bank Act 2004 which was passed in
2004 to replace Banking Law 1989, PNDC Law 225. It requires banks to
submit periodic returns to the Banking Supervision Department of the Bank
of Ghana and stipulates capital adequacy, liquidity, stated capital and
lending requirements for banks. Bank of Ghana, the Central Bank is the
only institution mandated in the country to grant banking licenses to new
banks wishing to operate in the country. With the introduction of Universal
Banking which provides all banks with equal opportunities to widen their
product offerings, all existing banks which want to convert to Universal
Banking will have to increase their minimum capital to ¢70.0 billion (about
US$70billion). This threshold has also become the amount that all new
banks will have to raise to be granted an operating license henceforth. New
legislations passed in 2005 included the new Banking Bill and the Payments
Systems Bill. The former is expected to provide a more effective
supervision of the banking system by the Bank of Ghana whilst the latter is
supposed to modernize the legal framework as well as improve the
efficiency of the payments system.
New Labour Law in place, Labour Act 2003, Act 651. Before then, the
industrial Relations Act 299 of 1965 and the labour Decree of 1967, NLCD
157 were the laws governing industrial relations in Ghana, as well as other
laws scattered in various pieces of legislation. During this time, industrial
relation matters and disputes settlement were the preserve of the Ministry of
96
Labour who did this through its Labour Department headed by the Chief
Labour Officer.
Though there is improvement in the judiciary, there are lapses in the
judgment delivery system as cases delay for at times more than four years.
3.5.2 Summary of Industry Characteristics
High degree of industry concentration-4 banks holds 68% of industry
deposits and assets.
Currently 21 banks, 4 dominant, 6 in the middle and 11 small ones in terms
of total assets and profitability.
Huge potential banking market, given the large un-banked informal sector
and high margins-hence entry by new banks.
Increasing competition resulting from
New entrants from Nigeria e.g. Standard Trust Bank, Zenith Bank,
Guaranty Trust, Inter Continental Bank Plc.
Potential entrants e.g. FNB of South Africa, Citibank
New product launches – similar product offerings
All banks have full functional Wide Area Network, Networked
channels
Multi banking by corporates – intense price competition and adverse impact
on margins
Introduction of universal banking (which enables all banks to engage in
commercial as well as merchant banking) likely to intensify competition
especially for the retail sector high net worth.
Predominantly cash based payment system – very expensive.
97
Mutual funds and capital market products could lead to disintermediation
Higher loan losses due largely to fragile economy (particularly in 1999 and
2000
Divestiture of Ghana Commercial Bank (GCB) may lead to significant
increased competition
Very high reserve requirements – 9% primary and 15%, which act as
implicit financial tax.
As interest margins and spreads collapse, the industry would generally look
to non-interest income and rigorous cost management for its profit.
High operating cost arising from staff cost and operational infrastructure
(technology).
3.5.3 Key Strategic Opportunities from environment
Universal Banking licence
Local product development
Cards business
Money Transmission service
Expansion into the West African Sub-region
98
3.6 Structure of the Banking Sector-2005
Fig 3.2: Structure of the Banking Sector -2005
Development Banks Universal Banks Merchant Banks
Rural Banks Commercial Banks
Agric Dev’t Bank HFC Bank Ghana Ltd Amalgamated Bank Ltd 120 RBs Ghana Commercial Bank Ltd
Prudential Bank Ltd Ecobank Ghana Ltd First Atlantic Merchant Bank SG-SSB Ltd
National Inv’t Bank Ltd Merchant Bank Ghana Ltd Standard Chartered Bank Ltd
CAL Bank Ltd Barclays Bank of Ghana Ltd
Stanbic Bank Ltd Unibank Ghana Ltd
Standard Trust Bank Ghana Ltd Metropolitan & Allied Bank
Guaranty Bank Ghana Limited The Trust Bank Ltd
Zenith Bank Ghana Limited International Commercial Bank Ltd
The banking sector in Ghana comprises twenty-one (21) Deposit Money Banks
(DMBs) and 120 rural banks. The DMBs includes eight (8) Universal banks, two
(2) Merchant banks, three (3) Development banks and eight (8) Commercial Banks.
The banking industry in Ghana is undergoing rapid change driven partly by
technological change and the rapid growth of competing non-bank financial
institutions. Key features of the banking industry are as follows:
- A general lack of financial innovation;
- High spreads between deposit and lending rates;
- A re-emergence of non-performing loans assets portfolios.
BANK OF GHANA
Development Banks
(3)
Universal Banks
(8)
Merchant Banks
(2)
Commercial Banks
(8)
ARD APEX BANK
(Rural Banks - 120)
99
- Limited credit facilities for private sector;
- A high rate of investment in government securities compared to loans and
advances to the private sector;
- Low savings rate reflected in a high level of currency outside the banking
system; and
- Efficient credit operations are constrained by the lack of a credit
information system.
Competition in the industry has been keen over the past five years. The distinction
between merchant banking, commercial and development banking became
increasingly blurred as commercial banks and non-banking financial institutions
such as discount houses were undertaking certain activities which traditionally,
have been the preserve of merchant banks. The Central Bank of Ghana has
authorized the adoption of Universal Banking Business (UBB) and therefore banks
in the country are operating Retail, Corporate and Investment banking.
There is a strong indication that demand capacities still exist in the growing
banking industry. The Financial and Banking sub-Sector is considered the backbone
of capital accumulation. According to the Ghana Statistical Service, in 2002 and
2003, the Finance & Insurance sub-sector’s contribution to growth in GDP was
5.2% and 4.3% respectively.
Total assets of the banking system (Assets of rural banks are not included) grew by
413.26 per cent (¢6,094.4 billion) from the December 2003 position to ¢31,279.9
billion. The growth in assets was driven principally by three banks which
accounted for 41.2 per cent of the total increase.
100
The growth reflected mainly in net advances, investments and cash and short term
funds, which went up by ¢2,242.7 billion ¢1,764.0 billion and ¢1,153.7 billion
respectively. The increases in assets were financed by 29.9 per cent, 28.7 per cent
and 14.1 per cent increases in Deposits and Shareholders’ Funds & other liabilities
respectively.
In 2002, the ARB Apex Bank was officially opened to provide “mini-central
banking” services to the rural banks. The DMBs and the rural banks sub-sectors
recorded significant growth in balance sheet. As at 31st December 2003, total
assets of both the rural and community banks totalled ¢1,281.8 billion, representing
an increase of 52.6% over the 2002 position of ¢840.2 billion. In 2003, there was
an increase of 43.7% and 48.4% in Gross Loans & Advances and Investment in
Government Securities respectively.
The Payment System in Ghana has recorded two developments. The Bank of
Ghana’s Real Time Gross Settlement (RTGS) also known as the Ghana Inter-bank
Settlement (GIS) system was launched in 2002. It links participating banks by
electronic means to the Bank of Ghana to ensure computerised processing and
settlement of inter-bank transactions on gross basis in real time.
Another development in the Ghanaian payment system was the introduction of an
online Debit Card, E-Card by three banks in collaboration with a network provider
within the Accra-Tema metropolitan area.
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3.6.1 Concentration
The market concentration shows how competitive an industry is. If a market is very
competitive we expect the concentration ratio to be low as participants strive to
acquire a sizeable share of the market thus leading to efficiency. Tables 4.8a and
4.8b show the market concentration of deposits and assets for the six major banks
from 1998 to 2005.
In terms of deposits, the share of the six major banks fell slightly from 86% in 1998
to 71 % in 2005. The six banks have held about 80% (on average) of total deposits
in the industry between 1998 and 2005. The picture is not different for that of
assets, where the share of the six banks decreased marginally from 85% in 1998 to
70% (also 80% on average within the same period). The market concentration of
the six major banks points to oligopolistic competition and indicates that the
reforms have not generated enough competition in the banking industry as the
market is still dominated by the six banks. The banking industry therefore has
enough opportunities for growth and expansion.
Table 3.13a : Market Concentration - Deposit (1998-2005) % Bank 1998 1999 2000 2001 2002 2003 2004 2005
GCB 21 18 22 20 20 19 21 19
SCB 23 23 20 19 18 17 16 13
BBG 15 17 18 20 16 17 15 14
SG-SSB 13 11 9 9 8 8 8 7
EBG 9 11 9 9 9 8 7 10
ADB 5 5 7 7 8 9 8 7
TOTAL 86 85 85 83 79 78 75 71
Source : Calculated from Audited Accounts of Banks
102
Table 3.13b : Market Concentration - Assets (1998-2005) % Bank 1998 1999 2000 2001 2002 2003 2004 2005
GCB 21 18 18 26 24 20 18 16
SCB 19 23 25 16 16 15 14 14
BBG 14 14 14 16 14 15 15 14
SG-SSB 13 11 10 9 9 8 8 8
EBG 8 9 8 7 7 7 8 9
ADB 10 10 10 10 10 12 10 9
TOTAL 85 84 86 84 80 77 73 70
Source : Calculated from Audited Accounts of Banks’
Fig 3.3 : Market Concentration of Deposits and Assets 1998-2005
0
20
40
60
80
100
1998 1999 2000 2001 2002 2003 2004 2005
Year
Con
cent
ratio
n (%
)
DepositsAssets
In the area of asset pricing, a survey by Bank of Ghana revealed that only a few
leading (two out of the top 5) banks have been practicing detailed activity-based
costing to come out with prices of their products. The remaining three top banks
were found out to accept and apply the rates computed by their competitors or
changed them marginally for a section of their clients. There is some anecdotal
evidence of leadership-followership tendencies among the banks in the area of
product delivery. Hence, there is no significant evidence of price wars among banks
in Ghana. It can be concluded that the kind of competition among banks in Ghana is
an impediment to the efficient operations of banks.
103
3.13c: Share of the Top 5 Banks in Total Industry Position (%)
Year Cash & Short- Investments Loans & Total Deposits Shareholders'
Term Fund Ods (Net) Assets Funds
1988 84.82 87.28 67.44 80.84 83.95 (21.48)
1989 89.72 84.86 76.54 83.05 84.95 4.57
1990 88.07 77.55 69.26 81.53 82.15 89.12
1991 84.39 83.38 64.49 80.90 81.42 91.68
1992 77.50 77.70 63.71 75.88 80.90 89.17
1993 81.54 80.00 68.74 78.49 76.37 77.79
1994 80.50 77.55 66.66 78.32 80.33 80.68
1995 71.60 78.76 66.51 74.43 74.12 74.67
1996 76.83 71.77 67.71 74.33 76.67 72.68
1997 71.00 77.15 77.29 76.75 78.96 78.40
1998 75.16 75.20 79.39 76.65 77.59 78.39
1999 62.75 78.52 81.56 76.61 76.39 75.75
2000 61.75 81.29 81.90 78.44 75.92 73.66
2001 68.87 76.55 81.46 77.57 73.71 75.39
2002 64.50 84.53 72.78 74.49 73.79 77.36
Source: Banks' Audited Accounts
3.6.2 The Retail Market
A review of the retail market segment indicates deposits from individuals constitute
about 55% of retail market deposits as shown below. Of this, over 50% is
concentrated in the hands of only four banks. Barclays, Ghana Commercial Bank,
Standard Chartered, and SG-SSB Bank together hold over half of the industry’s
retail deposits.
104
Table 3.14: Structure of Retail Deposits in the Banking Industry (2000–Feb 2005)
Dec-00
Dec-01 Dec-02
Dec-03
Dec-04
Feb-05 Average
Amt Share Amt Share Amt Share Amt Share Amt Share Amt Share Amt Share
(¢'Billio
n) i. Individuals 1,727.2 61.3% 2,653.5 54.2% 4,345.3 58.0% 5,677.3 53.5% 7,182.0 52.0% 7,384.5 53.8% 4,828.3 55.5% ii. Other private Ent. 708.6 25.1% 1,465.2 29.9% 1,871.5 25.0% 2,635.3 24.8% 3,734.8 27.0% 3,546.2 25.8% 2,326.9 26.3% iii. Gov't dept. &
agencies 166.2 5.9% 248.3 5.1% 440.0 5.9% 1,450.0 13.7% 1,430.5 10.4% 1,248.4 9.1% 830.6 8.3% iv. Public Ent. /other 215.8 7.7% 532.0 10.9% 831.1 11.1% 844.5 8.0% 1,468.0 10.6% 1,549.3 11.3% 906.8 9.9% Total Cedi Deposits 2,817.9 100.0% 4,898.9 100.0% 7,487.9 100.0% 10,607 100.0% 13,815.2 100.0% 13,728.3 100.0% 8,892.6 100.0%
Source: Research Dept. Bank of Ghana
The retail market is the main source of deposits for these banks accounting for 84%,
81% and 74% of deposits for BBG, SCB and GCB respectively. SG-SSB’s retail
banking contributes about 40% to deposits. Advantages of sourcing funds from this
segment include lower interest costs and flexibility in fund allocation. It is therefore
attractive for growth proposals to target this market.
3.6.3 Banking Services Delivery and Products
Competition is vital for both growth and development of the financial sector, and
the economy in general. A major improvement in the banking service delivery,
which has injected competition and efficiency in the banking sector, has been the
introduction of innovative products, as well as improvements in technology.
Examples include the introduction of the SSB Sika Card, Standard Chartered Bank
and Barclays ATMs and networking which facilitates banking transactions and
reduced transaction costs to the public.
105
3.6.4 Performance of the Banking Sector
Evidence from key financial performance indicators shows a mixed result. The
capital adequacy ratio (CAR) was about 12.5% as at the end of December 2005,
well above statutory requirement of 10%, with a wide dispersion among banks.
However, the adverse macroeconomic developments in 1999 and 2000 have
impacted negatively on the asset quality of the bank’s loan portfolio (Buchs and
Mathisen 2003). The nonperforming loans as a share of total loans increased from
16.2% in 2000 to as high as 28.6% in 2002.
The banking sector is also characterised by high overhead costs. The five largest
banks incur on average overhead cost of 7% of total asset, which is similar to the
sector as a whole but higher than Sub-Saharan African average of 5.7%. The high
cost could be partly explained by recent high investments in banking infrastructure,
especially in the telecommunication, which still suffers from interconnectivity
problems. The trend also, to an extent, reflects the marketing practices in the sector
in terms of cost sharing. For instance the refusal to network the automated teller
machines might have led to huge private investments in telecommunication.
Profitability indicators, on the other hand, show that high overhead costs and
sizable provisioning notwithstanding, Ghana’s return on assets (ROA) and equity
(ROE) are among the highest in Sub-Saharan Africa. This is reflected in the wide
interest margins that prevail in the financial system. For example, in 2003 ROA
averaged 6.40% whilst ROE stood at 35.56%, which are remarkable. Similarly,
both net interest revenue and non-interest revenue were high. Net interest revenue
and non-interest revenue were 63.18% and 36.83% respectively.
106
The stability enjoyed by the sector suffered a set back in December 2000 when
there was a rush on the banks. This led to the inability of some banks to satisfy
depositor’s withdrawals and depositors were asked to come back in later days for
their money (a semblance of the 2002 Argentina experience). The December 2000
bank panic was attributed to two main factors.
i. The increased withdrawal of money from the banking system by political
parties for political activities
ii. Increasing political risk and the fast depreciation of the cedi. As a result of
the depreciating cedi, people withdrew their monies from the banking
system and converted them into foreign currencies.
The wide spread margins, large overhead costs and sizeable supply of relatively
high-return government papers that characterized the financial system underlie the
high cost of intermediation. Also, the deterioration in the quality of bank’s loan
portfolio has negative implications for the stability of the financial system, since
wide interest margins also reflects the non-performing loan problem.
1999 16
2000 13.5
2001 20.75
2002 20.5
2003 18.5
Fig 3.4: Interest Rates Spreads (%) 1999-2003
107
The table below provides a summary of financial soundness for the banking sector
between 1997 to 2003 using CAMEL framework.
Table 3.15A: Financial Soundness Indicators (CAMEL) for Banking sector 1997-2003 (in % at year’s end, unless otherwise indicated)
1997 1998 1999 2000 2001 2002 2003
Capital Adequacy
Regulatory Capital to risk-weighted assets 15.2 11.1 11.5 11.6 14.7 13.4 9.3
Percentage of Banks greater or equal to 10% 87.5 75.0 60.0 62.5 64.7 52.9 66.7
Percentage of Banks below 10% and above6%
minimum 6.3 12.5 40.0 37.5 35.3 35.3 27.8
Percentage of Banks below 6% minimum 6.3 12.5 0.0 0.0 0.0 11.8 5.6
Capital (Net worth) to Asset 13.4 12.2 12.2 11.9 13.1 12.6 12.5
Asset Quality
Foreign Exchange loans to total loans 25.6 28.5 33.4 35.3 34.1 33.8 0
Past due loans to gross loans 24.6 18.9 21.1 16.2 28.0 28.6 24.4
Non performing loans 21.6 17.2 12.8 11.9 19.6 22.7 18.3
Watch-listed loans 3.0 1.7 7.3 4.3 8.4 5.9 6.0
Provisions as % of past due loans 78.0 89.4 67.2 58.6 46.4 63.6 64.4
Earnings and Profitability
Net profit (before tax)/net income 51.5 39.2 61.2 52.4 45.9 43.4 39.2
Return on Asset 8.0 8.6 8.5 9.7 8.7 6.8 6.4
Return on Equity 39.9 48.9 48.8 65.7 49.7 36.9 54.0
Expense/income 44.0 42.2 44.3 38.2 40.2 47.3 36.0
Interest rate spread (deposit money banks)
Lending rates minus demand deposit rates 37.0 33.8 32.5 30.5 30.5 30.5 23.3
Lending rates minus savings deposit rates 16.3 22 23.5 29.3 29.5 25.5 23.0
Liquidity 1997 1998 1999 2000 2001 2002 2003
Actual reserve ratio (as a % of total deposits) 60.1 64.8 61.8 49.9 62.4 66.0 66.1
Excess reserve ratio 17.1 21.8 18.8 5.9 18.4 22.0 22.1
Loan/deposit 42.2 48.7 59.0 64.0 63.9 50.1 56.1
Foreign Exchange liabilities/total liabilities 24.9 21.1 29.7 36.2 27.0 27.4 0.0
Sensitivity to market risk
Net foreign exchange assets (liabilities) to shareholders
fund 62.9 48.1 -7.6 -9.4 22.9 24.3 0.0
Source: IMF staff country report No. 396/03 and Bank of Ghana.
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Table 3.15B : Growth in Key Banking Industry Indicators 1990 1998 1999 2000 2001 2002 2003 2004 2005
Growth in Assets 52.1 32.0 47.8 77.6 15.2 31.8 33.4 22.1 17.1
Growth in Net Advances 4.7 19.7 64.0 84.0 14.8 10.0 51.2 26.0 41.9
Growth in Deposits 31.6 30.9 41.9 69.3 15.7 36.7 35.8 26.2 19.4
Growth in Profit after Tax (335.8) 28.3 41.4 111.0 8.1 (4.0) 17.7 39.4 (2.8)
Growth in Equity (459.1) 37.4 29.0 66.5 29.6 22.8 26.8 31.6 39.4
Source : Computed from Audited Accounts of Banks'
3.6.5 Possible Factors Explaining Bank Profitability and efficiency of
Intermediation
At least three factors may have prevented further financial deepening in Ghana so
far, and which may be relevant for the interpretation of both profitability and
efficiency indicators of the banking system. The first factor is macroeconomic
policies, as macroeconomic stability is essential to the development of the financial
sector. This is relevant because Ghana’s macroeconomic policies over the last
decade until the current administration (from 2001) has been characterized by
periodic slippages in financial discipline, leading to volatile and general high
inflation, large exchange rate swings, and negative real interest rates for extended
periods. The most recent example of macroeconomic imbalances includes the
severe terms of trade shock of 1999-2000, which combined with fiscal slippages,
resulted in inflationary pressures, 15% exchange rate depreciation, and a buildup of
a sizeable domestic government debt. This high degree of uncertainty associated
with Ghana’s macroeconomic environment has negatively affected both the size
and the quality of financial intermediation. This development is supported by the
low level of overall savings and investment. Another piece of evidence is the short
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time horizon in the overall financial sector. Long-term savings is yet to be
implemented.
Ghana’s savings and investment rates remain very low even by Sub-Saharan
African standards. This has contributed to the low growth rates which average 4.3%
in the 1990s. The low domestic savings and investment rate is due to high inflation,
huge budgetary deficits, insignificant private sector (Gyimah-Larbi, 1999). What
was experienced in the 1990s was that the individual households continued to hold
substantial proportion of savings averaging 75% as shown below in Table 3.3a.
Table 3.3b on the other hand shows that there was an increasing propensity to hold
money market instruments as well as savings deposits as opposed to time deposits.
This was a reflection of the economic situation in Ghana. As inflation got out of
hand, more of the excess balances were held in money market instruments with
some of the highest interest rates to hedge against inflation. Money market
instruments dominated with 61.2% in 2000 of the total private savings. Savings
deposits were just 23.8% and time deposits, 14.9%. This is an indication of an
increase in domestic borrowing by the government. It may be noted that money
market instruments have become a much bigger share of the financial assets of
Ghanaian households in recent times than they ever were (ISSER, 2000). In a way,
while it reflects the growing diversification of the financial market, it also
highlights the considerable distortions in the market.
What was more significant is that deposits in foreign currencies grew much faster
than any of the domestic instruments. In other words, more and more Ghanaians
switched from the Cedi-based instruments to foreign currency denominated ones, a
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trend that had significant implications for the monetary position with the growing
demand for foreign exchange.
Table 3.16a: Distribution of Private Financial Savings by Type of Holder (1994-2001) (%) Year Household
(Individuals) Private Enterprise Public Sector Total
1994 76.3 7.1 16.6 100
1995 77.7 6.9 15.4 100
1996 75.0 7.0 18.0 100
1997 72.4 18.4 9.2 100
1998 76.1 19.2 4.7 100
1999 75.1 20.7 4.2 100
2000 71.0 20.5 8.5 100
2001 73.6 21.6 4.8 100
Source: Bank of Ghana
Table 3.16b - Total Private Savings with Formal Financial Institutions, 1990-2001 (%)
Year Money Market
Instruments
Savings
Deposits
Time Deposits Total
1990 44.3 46.7 9.0 100
1991 33.1 55.6 11.3 100
1992 35.8 48.5 15.7 100
1993 53.2 39.8 7.0 100
1994 48.2 44.2 7.6 100
1995 48.9 40.2 10.9 100
1996 51.0 39.8 9.2 100
1997 52.0 30.7 17.3 100
1998 55.6 25.3 19.1 100
1999 51.5 19.9 28.6 100
2000 61.2 23.8 15.0 100
2001 59.5 25.3 15.2 100 Source: Bank of Ghana
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Table 3.16b appears to depict an interesting feature: while savings deposits and
time deposits are going down, money market instruments (treasury bills in this
case) appear to be increasing. Together with the high returns offered, this situation
has exacerbated the crowding-out effect on private sector lending.
A second possible factor is the risky lending environment prevailing in Ghana, as
reflected in the high level of past-due nonperforming loans. This is largely due to
the significant losses of some state-owned companies, but also reflects the lack of
any central credit information system and the lack of cooperation among banks
sharing customer information. Although nonperforming loans have some
substantial provisioning implications, provisioning standards are lower in Ghana
than in most African countries. Depending on loan classification practices, this may
suggest that the asset quality of banks’ loan portfolio is somewhat overestimated,
which may act as a further disincentive to engage in financial intermediation.
A third factor that may account for low and inefficient financial intermediation in
Ghana is the presence of uncompetitive market structure.
6.6 Key Performance Indicators
The key performance indicators of banks in Ghana for the year ended December
2004 was mixed. Whilst the Capital Adequacy Ratio and Loan Loss Provision to
Total Credit improved to 27.7% and 10.9% respectively, Interest Margin and
Return on Equity worsened to 9.5% and 24.1% respectively. Below are key
performance indicators of the Banking Industry from 2001 to 2004.
112
Table 3.17: Key Performance Indicators 2001-2004 Indicator
2001 %
2002 %
2003 %
2004 %
2005 %
Return on Assets 8.7 7.3 6.3 4.6 4.9
Return on Earning Assets 9.4 9.3 8.0 5.9 6.3
Return on Equity 49.7 37.6 33.4 22.9 24.1
Net Interest Spread 12.4 11.9 12.3 8.9 10.8
Expense to Income 40.2 59.0 63.9 63.5 68.7
Loan Loss Provision to Total
Credit
15.0 18.2 15.4 14.6 10.9
Interest Margin 14.4 10.1 10.6 7.1 9.5
Capital Adequacy 14.7 13.4 9.3 13.7 27.7
Source: Bank of Ghana Annual Report 2004, Calculated from 2005 published Accounts of Banks.
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Table 3.18: Comparative Performance of Banks in 2004
Name of Bank GCB SCB BBG
SG-
SSB ADB NIB EBG MBG CAL FAMBL TTB PBL ICB ARB MAB SBL ABL HFC Average
Productivity Ratios
Return on Assets (ROA) 2.94% 4.38% 5.53% 4.35% 3.57% 3.49% 3.64% 4.24% 4.22% 1.02% 4.14% 2.07% 2.28% 5.14% 0.89% 2.05% 1.71% 3.01% 3.26%
Return on Equity (ROE) 27.40% 43.49% 51.75% 32.52% 19.75% 30.30% 36.70% 32.04% 20.98% 15.48% 51.96% 37.60% 11.72% 24.99% 13.85% 15.65% 21.54% 17.60% 28.07%
Return on Earning Assets
(ROEA) 4.06% 8.78% 8.24% 6.54% 6.46% 5.14% 6.76% 7.49% 6.35% 1.56% 6.29% 3.17% 3.08% 9.46% 1.60% 3.91% 2.50% 4.22% 5.31%
Int Expense/ Int Income 22.03% 26.49% 14.07% 22.52% 33.21% 30.50% 29.06% 34.10% 48.55% 51.16% 34.22% 48.80% 49.07% 19.60% 45.34% 30.88% 70.17% 48.90% 36.59%
Net Int Income / Total Income 75.39% 58.56% 66.20% 63.74% 47.85% 61.84% 60.17% 44.05% 48.40% 53.85% 66.00% 62.58% 57.89% 72.40% 39.90% 52.90% 48.63% 82.40% 59.04%
Comm & Fess / Total Income 22.62% 30.68% 32.41% 32.96% 29.60% 15.89% 39.27% 30.63% 28.44% 21.52% 24.91% 31.40% 17.27% 6.95% 27.26% 29.24% 42.91% 11.13% 26.39%
Op. Expense / Total Income 63.80% 48.31% 37.91% 56.50% 47.82% 50.29% 46.40% 37.24% 48.09% 58.10% 46.43% 65.70% 58.97% 65.07% 70.61% 61.77% 64.64% 58.86% 54.81%
Equity / Total Assets 10.74% 10.07% 10.68% 13.38% 18.09% 11.53% 9.93% 13.22% 20.11% 6.61% 7.96% 5.50% 19.48% 20.56% 6.44% 13.12% 7.95% 17.08% 12.36%
Activity Ratio
Market Share of Deposits 20.58% 15.95% 15.26% 7.62% 7.74% 2.15% 9.35% 5.17% 2.32% 1.23% 2.46% 2.43% 1.24% 0.90% 0.63% 2.59% 1.54% 0.83%
Advances/Deposits 49.11% 49.50% 65.27% 47.13% 52.71% 174.46% 36.18% 60.27% 62.73% 84.94% 43.75% 58.46% 25.63% 4.43% 33.38% 37.21% 25.40% 133.34% 57.99%
Advances/Total Assets 37.36% 37.22% 43.12% 30.53% 27.32% 52.90% 29.13% 45.31% 36.50% 44.14% 24.80% 33.77% 19.71% 3.28% 27.10% 26.86% 22.20% 38.47% 32.21%
Total Deposits/Total Assets 76.08% 75.19% 66.07% 64.77% 51.82% 30.32% 80.53% 75.17% 58.19% 51.96% 56.68% 57.76% 76.89% 74.11% 81.20% 72.20% 87.38% 28.85% 64.73%
Leverage Ratio
Bad Debt / Total Income 12.41% 1.01% 6.03% 5.71% 23.85% 16.88% 2.45% 16.88% 7.77% 26.51% 8.25% 6.40% 6.64% 0.41% 20.76% 13.64% 6.94% 3.73% 10.35%
CAPITAL ADEQUACY 10.74% 10.07% 10.68% 13.38% 18.09% 11.53% 9.93% 13.22% 20.11% 6.61% 7.96% 5.50% 19.48% 20.56% 6.44% 13.12% 7.95% 17.08% 12.36%
Prov./Total Loans 4.70% 0.37% 2.17% 2.96% 12.20% 4.62% 1.03% 5.72% 2.62% 8.85% 4.86% 1.95% 3.32% 1.85% 12.02% 5.57% 3.01% 0.99% 4.38%
Bad Debt / Total Loans 4.70% 0.37% 2.17% 2.96% 12.20% 4.62% 1.03% 5.72% 2.62% 8.85% 4.86% 1.95% 3.32% 1.85% 12.02% 5.57% 3.01% 0.99% 4.38%
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3.7 Competition (Competitive Strength of Banks)
The Banking scene in Ghana is being dominated by the “big 8” namely GCB,
BBG, SCB, ECO, ADB, SG-SSB MBG and NIB, who together control about
85% of industry deposits and assets. The market share of the top 8 banks was
92% as at 2000 and this has dropped to 85% as at 2004. This is due to the
competition from the existing and new entrants. This means that the market is
still controlled by the top 8 Banks indicating weak competition.
3.7.1 Market Share of Deposits
Most banks have generally registered growth in deposits during 2004 as shown
below:
Table 3.19: Growth in Market Share 2004 Bank Deposits (¢
Millions) Percentage
Share Deposits(¢ Millions)
Percentage Share Increase
2004 2003 Ghana Commercial Bank Limited (GCB) 4,265,733 21% 3,183,830 19.45% 33.98% Standard Chartered Bank Limited(SCB) 3,306,645 16% 2,817,945 17.21% 17.34% Barclays Bank (Ghana) Limited (BBG) 3,163,930 15% 2,771,415 16.93% 14.16% Ecobank Ghana Limited (EBG)
1,938,675 9% 1,347,282 8.23% 43.90%
Agricultural Development Bank (ADB)
1,603,705 7.77% 1,518,195 9.27% 5.63%
SG SSB Bank Limited (SG SSB)
1,579,923 7.65% 1,263,210 7.72% 25.07%
Merchant Bank Ghana Limited (MBG)
1,071,130 5.19% 795,605 4.86% 34.63%
Stanbic Bank Limited (SBL)
536,286 2.60% 303,005 1.85% 76.99%
The Trust Bank (TTB) 508,956 2.46% 391,746 2.39% 29.92%
Prudential Bank Limited (PBL)
503,950 2.44% 305,914 1.87% 64.74%
CAL Bank Limited(CAL)
479,435 2.32% 335,945 2.05% 42.71%
National Investment Bank (NIB)
446,703 2.16% 345,108 2.11% 29.44%
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Bank Deposits (¢ Millions)
Percentage Share
Deposits(¢ Millions)
Percentage Share Increase
2004 2003 International Commercial Bank Ltd. (ICB)
257,516 1.25% 166,442 1.02% 54.72%
HFC Bank Limited (HFC)
172,910 0.84% 111,910 0.68% 54.51%
Unibank Ghana Limited (UBL)
112,206 0.54% 73,558 0.45% 52.54%
First Atlantic Merchant Bank Ltd. (FAMBL)
249,788 1.21% 253,072 1.55% -1.30%
Metropolitan & Allied Bank Limited (MABL)
130,682 0.63% 118,958 0.73% 9.86%
Amalgamated Bank Limited (ABL)
320,020 1.55% 266,393 1.63% 20.13%
TOTAL 20,648,193 100% 16,369,534 100.00%
Fig 3.5: Deposits by Banks (2003-2004)
F
3.7.2 Comparative Trend Analysis of Market Share of Deposits (2000-
2004)
Comparative trend analysis of industry deposits from 2000 – 2004 as shown in
the table below indicates that Ghana Commercial Bank is the largest bank with
average market share of 20%, followed by Standard Chartered Bank, Barclays
and Ecobank in that order. The trend indicates that there is no much
competition among the top banks. The Banks’ market share has been stable
over the period with little or no competition at the top 8 banks (4 foreign owned
Deposits by Bank (2003 -2004)
-
500,000
1,000,000
1,500,000
2,000,000
2,500,000
3,000,000
3,500,000
4,000,000
4,500,000
Banks
Mill
ions
of C
edis
2003
2004
2003 3,183,830 2,817,945 2,771,415 1,347,282 1,518,195 1,263,210 795,605 303,005 391,746 305,914 335,945 345,108 166,442 111,910 73,558 253,072 118,958 266,393
2004 4,265,733 3,306,645 3,163,930 1,938,675 1,603,705 1,579,923 1,071,130 536,286 508,956 503,950 479,435 446,703 257,516 172,910 112,206 249,788 130,682 320,020
GCB SCB BBG EBG ADB SSB MBG SBL TTB PBL CAL NIB ICB HFC UNI FBL MAB ABL
116
and 4 locally owned banks). Merchant Bank captures 5% market share of
deposits ranking 7th while National Investment Bank ranked 8th with a market
share of 2%.
Table 3.20: Market Share of Deposits 2000 2001 2002 2003 2004
GCB 22% 19% 20% 20% 21%
SCB 19% 18% 18% 17% 17%
BBG 17% 20% 17% 17% 15%
ECOBANK 11% 12% 9% 8% 9%
SG-SSB 9% 8% 9% 8% 8%
ADB 7% 7% 8% 9% 8%
MBG 5% 5% 5% 5% 5%
NIB 2% 2% 2% 2% 2%
TOTAL 92% 91% 88% 86% 85%
3.7.3 Cost of Funds
The banks’ cost of borrowing, as measured by interest expense to interest
income ratio have been on the decline from average of 42% in 2000 to 25% by
2004. This shows an improvement in the cost of mobilisation of deposits as all
the banks have witnessed a drop in interest expense/interest income ratio.
Barclays seems to be having the lowest cost of funds and this largely explains
why Barclays is the best profitable bank in Ghana. Barclay’s strength lies on
the sourcing of deposits. This is due primarily to cheap deposits sources such as
retail/mass market, domineering in the corporate market/customers; NGOs and
Embassies accounts and the bank’s branches are strategically located.
117
Merchant Bank and Ecobank did not initially do well in cost of funds simple
because they were merchant banks and were dealing with corporates and their
license did not allow them to do retail banking business. They were sourcing
expensive deposits from corporates in the form of fixed deposits. But since the
universal banking license in 2002, there has been an improvement and this is
likely to change in the future.
Table 3.21 : Comparative Trend Analysis of Interest Expense/Interest Income (2000-2004) 2000 2001 2002 2003 2004
GCB 58% 20% 19% 24% 22%
SCB 49% 40% 25% 29% 27%
BBG 29% 27% 21% 15% 14%
SG-SSB 30% 29% 26% 27% 23%
ADB 36% 31% 31% 32% 33%
NIB 28% 13% 15% 24% 17%
ECOBANK 42% 37% 39% 32% 29%
MBG 65% 60% 45% 54% 34%
INDUSTRY 40% 33% 28% 31% 28%
3.7.4 Return on Equity (ROE)
The period 2000-2004 witnessed downward trend in ROEs for most of the
Banks. The drop in return on equity is partly due to the high operating cost of
most banks mostly from the infrastructural cost (technology) and staff cost as
well as non-performing assets. For example, Merchant Bank poor performance
in 2002 was simply from the non-performing loans and therefore its ROE was a
low 14% in 2002 but recovered to achieve 32% ROE in 2004. This
118
development on one hand illustrates the Merchant Bank’s success of its
restructuring plan that was initiated in 2003. Ghana Commercial Bank, the
largest bank in terms of Assets appears not to be doing well because of its high
operating cost as witnessing by its cost/income ratio of more than 65% largely
from staff cost. Ghana Commercial Bank has 132 branches across the country
but its performance is weak largely due to its huge cost of operation.
Table 3.22: Comparative Trend Analysis of Return on Equity (ROE) (2000-2004) 2000 2001 2002 2003 2004
GCB 58% 49% 40% 19% 27%
SCB 60% 52% 47% 43% 44%
BBG 87% 82% 54% 55% 52%
SG-SSB 46% 42% 28% 27% 33%
ADB 43% 32% 17% 17% 20%
NIB 56% 16% 19% 25% 30%
ECOBANK 61% 53% 39% 38% 37%
MBG 15% 24% 14% 19% 32%
INDUSTRY 52% 45% 48% 29% 32%
3.7.5 Return on Assets (ROA)
Return on assets also follows the same trend as the return on equity. In all
Barclays seems to be the most profitable Bank followed by Standard Chartered
Bank and Ecobank in that order.
119
Table 3.23: Comparative Trend Analysis of ROA (2000-2004) 2000 2001 2002 2003 2004
GCB 6% 4% 4% 2% 4%
SCB 4% 5% 4% 5% 7%
BBG 7% 7% 6% 6% 9%
SG-SSB 6% 7% 4% 4% 7%
ADB 8% 7% 4% 3% 4%
NIB 15% 5% 4% 3% 5%
ECOBANK 5% 4% 4% 4% 6%
MBG 3% 4% 2% 2% 7%
Industry 6% 5% 4% 3% 4%
3.7.6 Quality of Loan Assets
Provisions for Bad Debts/Gross Advances & Loans ratio otherwise known as
the “Solvency Index”, measures the “health” status of banks. A low bad debt to
gross loans ratio is an indication of good asset quality, which is a mark of
efficient banking. As indicated in the table below, Standard Chartered Bank
(SCB), Barclays Bank Ghana (BBG), and Ecobank (ECB) are few banks in the
group who have been maintaining relatively low bad debts to gross loans ratio
during the period. These are all foreign-owned banks with strong credit culture.
The local banks, Ghana Commercial Bank, National Investment, Agricultural
Development Bank and Merchant Bank seem to have weak credit culture.
Evidence seems to suggest that foreign owned banks have better credit culture
than locally-owned banks in Ghana.
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The increase in bad loans of most of these banks, were attributed to the
prevailing adverse economic conditions (high inflation and interest rates)
making it difficult for most borrowers to pay back their loans.
Table 3.24 : Comparative Trend Analysis of Bad Debt/Total Loans (2000-2004) 2000 2001 2002 2003 2004
GCB 9.7% 9.8% 13.9% 6.4% 4.7%
SCB 7.1% 8.3% 0.5% 1.0% 0.4%
BBG 2.1% 1.3% 1.1% 3.3% 3.3%
SG-SSB 3.6% 7.4% 6.4% 7.5% 3.0%
ADB 8.2% 10.9% 13.4% 11.0% 12.2%
NIB 21.5% 5.5% 5.8% 8.9% 4.6%
ECOBANK 1.5% 1.8% 1.2% 2.1% 1.0%
MBG 11.7% 6.3% 14.1% 10.3% 5.7%
INDUSTRY 6.9% 7.3% 6.2% 5.2% 3.8%
3.7.7 Cost Efficiency
The transaction costs ratio (i.e. Total Operating Expenses expressed as a ratio
of Total Operating Income) measures cost efficiency of a bank. The transaction
costs ratio shows the amount of resources needed to generate a unit of revenue.
Merchant Bank Ghana (MBG) topped the group as the bank with best managed
operating cost (37.2%) in 2004, followed closely by Barclays Bank (BBG)
(37.9%). Ghana Commercial Bank is the most inefficient bank in the group.
The GCB’s cost is mostly from staff cost and also due to the fact that some of
its branches are just making losses. GCB needs to close some of its branches in
the rural areas and concentrate on profit areas. One way to do this is to sell the
121
non-performing branches to the rural banks since rural banks have better
expertise in the rural areas than commercial banks.
Table 3.25 Comparative Trend Analysis of Operating Expenses/Operating Income (2000-2004)
2000 2001 2002 2003 2004
GCB 30% 31% 42% 57% 64%
SCB 39% 43% 51% 49% 48%
BBG 32% 33% 38% 39% 38%
SG-SSB 39% 34% 42% 52% 57%
ADB 38% 38% 45% 45% 48%
NIB 23% 57% 55% 47% 50%
ECOBANK 35% 41% 29% 42% 46%
MBG 30% 48% 48% 45% 37%
INDUSTRY 36% 38% 44% 49% 51%
3.7.8 Non-Interest Income
Non-Interest Income/Total Operating Income ratio is a useful indicator in
determining the share of non-interest income or non-funded (i.e. commission
and fees) in total earnings. Since interest income is subject to changes in market
rates, it is desirable for banks to generate non-interest income of at least 10% of
total income to withstand interest rate shocks. It appears Ecobank is very strong
in this regard.
122
Table 3.26: Comparative Trend Analysis of Non-Interest Income/ Operating Income (2000-2004) 2000 2001 2002 2003 2004
GCB 27% 12% 18% 19% 23%
SCB 19% 18% 30% 24% 31%
BBG 30% 29% 34% 32% 32%
SG-SSB 22% 22% 34% 29% 33%
ADB 39% 30% 36% 35% 30%
NIB 11% 16% 16% 16% 16%
ECOBANK 46% 37% 48% 43% 39%
MBG 22% 31% 28% 27% 31%
INDUSTRY 27% 22% 29% 27% 29%
3.8 SWOT Analysis
This section identifies the banks’ present strengths, weaknesses, opportunities
and threats and discusses how banks can leverage their strengths to harness the
market opportunities. To succeed, a Bank must use its present strengths and
opportunities to offset its present internal weaknesses and future threats. For
example, if a Bank is noted as one stop bank, going forward that Bank could
capitalize on its strength as a universal bank to take advantage of the
opportunities of large amount of cash holdings outside the banking system
through aggressive marketing. For the purposes of this analysis we have
selected top 8 banks, 4 foreign-owned and 4 locally-owned banks.
From the above competitive performance analysis we derive the following
SWOT analysis for the banking industry:
1. Foreign Owned Banks (Barclays, Standard Chartered, Ecobank and SG-SSB)
123
Strengths for Foreign Owned Banks
Strong risk management
capability than locally-owned
banks
Leverage on international
stature
Relatively strong capacity to
generate foreign exchange
Relatively easier access to
international capital market
than the locally-owned banks
Strong capital base than locally
owned banks
Trustworthy
Technologically advanced
Attractive and spacious
banking halls
Though fewer branches but
with higher market share of
deposits
Highly efficient and profitable
Weaknesses
Smaller branch network
Perception about mode of
operations skewed in favour
of the rich and expatriate
Higher initial deposit
requirement. Skewed against
low income group
Opportunities
Leverage on the word-wide
class franchise
Fee based corporate advisory
services
Trade investments
opportunities- very high returns
Threats
Impact of local currency
depreciation on shareholder
value
Declining interest rates and
therefore lower margins
New entrants into the markets
124
Improve Customer offering and
significant scope for improving
customer relationship
i.e. 4 Nigerian banks.
2. Locally-Owned Banks (Ghana Commercial, NIB, ADB and Merchant)
Strengths for Locally-Owned Banks
Wide branch network
particularly Ghana Commercial
Bank with 132 branches across
the country. ADB has about 46
branches second to GCB
Accept deposits from low
income group/small deposit
requirement
Wider customer base
Perceive as local and
indigenous bank
Strong in private inward
remittances business
Weaknesses
Weak technologically
capability
Inefficient and less profitable
Internationally not well
recognised and tend to loose
business from NGOs,
Embassies and donor funds
Weak risk management
capability. Most of them do
not have risk assessment
software particularly in
ALCO and credit. This
explains why most local
banks have huge non-
performing portfolios.
Deficiencies in credit
management i.e. poor
monitoring and evaluation
and deficiencies in legal
documentation
Poor service delivery
Unattractive branch premises
Opportunities
Leverage on the perception of
being indigenous banks.
Threats
Declining interest rates and
therefore lower margins
125
Access to Government Funds
for specific projects-e.g.
Agricultural related project
funds go to ADB and Export
Development and Investment
Fund (IDIF) is largely managed
by NIB.
New entrants into the markets
i.e. 4 Nigerian banks.
3.8.1 Strategic Issues emanating from the SWOT and Environmental
Analysis
Key issues arising from the environmental analysis and SWOT include the
following:
High degree of industry concentration-4 banks holds 56% of industry
deposits and assets as at December 2005.
Huge potential banking market, given the large un-banked informal
sector and high margins-hence entry by new banks.
Increasing competition resulting from new entrants from Nigeria e.g.
Standard Trust Bank, Zenith Bank, Guaranty Trust, Inter Continental
Plc and potential entrants e.g. FNB of South Africa, Citibank.
Product innovation
Introduction of universal banking (which enables all banks to engage in
commercial as well as merchant banking) likely to intensify competition
especially for the retail sector high net worth.
Predominantly cash based payment system – very expensive.
Higher loan losses due largely to fragile economy (particularly in 1999
and 2000)
126
Very high reserve requirements – 9% primary and 15%, which act as
implicit financial tax.
Declining interest rates and shrinking of margins, the industry would
generally look to non-interest income and rigorous cost management for
its profit.
High operating cost arising from staff cost and operational
infrastructure (technology).
SWOT Analysis seems to suggest that foreign-owned banks tend to be
technologically advanced, efficient and more profitable than locally
owned banks
3.9 Summary
Ghana has implemented a financial sector reform programme since 1988. The
banking system had suffered severe shallowing together with wide spread bank
distress as a consequence of the pre-reform policies of financial repression,
government control of banks and prolonged economic crisis. The financial
sector reforms included the liberalization of allocative controls on banks,
restructuring of insolvent banks and reforms to prudential regulation and
supervision.
The results of the reforms have been mixed. While banks are now more
prudently managed and supervised, major constraints to efficient financial
intermediation remain: macroeconomic instability in the 1999 and 2000 and the
still very shallow nature of financial markets. The SWOT analysis seems to
127
indicate that foreign-owned banks are technologically advanced, more efficient
and profitable than locally-owned banks.
Macroeconomic stability is essential but more important to the individual banks
is the improvement in the credit risk management.
128
CHAPTER FOUR
MODEL SPECIFICATION, ANALYSIS AND DISCUSSIONS
4.0 Methodology
The general objective of the study is to analyse competition, growth and
performance in the banking industry in Ghana. The specific objectives of the
study are: to find out the level of competition in the banking industry in Ghana,
to analyse how concentration in the banking industry is related to bank
profitability, to analyse how bank size affects the profits of banks in Ghana.
Based on these objectives, we hypothesize as follows:
H1: The profit growth of banks is not related to their size
H2: The profit of banks is related to their size.
(We tested these hypothesizes at 5% level of significance).
To achieve the above objectives we made use of the following methods:
4.1 Testing Levels of Competition in the Ghanaian Banking Industry
According to Porter’s 5 Forces Model, the level of competition in an industry is
determined by the interaction of five main forces: existing competitive rivalry
between suppliers, supplier power, customer power, entry barriers, and threat
from substitute products. Porter’s 5 forces framework is depicted in Fig 1
below.
129
Fig 4.1: Porter’s 5 Forces Model
The banking industry in Ghana has undergone a lot of transformation over the
past two decades due to policies implemented under the financial sector
reforms. The number of banks has increased due to easy entry and exit. This
has resulted in the diminishing of supplier power while customer power has
increased due to increasing customer sophistication and knowledge as well as
more banks available to customers to decide which bank to do business with.
The industry has also witnessed increasing innovation and the threat from
substitute products is eminent. Thus according to Porter’s 5 forces model, one
would expect competition in the industry to heighten.
Entry Barriers
Competition in the industry
Supplier Power Customer Power
Threat from
substitute
130
4.1.1 Herfindahl- Hirschman Indexes from 1989-2005 (HHI)
Competition arises where two or more providers of services/goods offer their
products, as substitutes, to buyers in the same market (Korsah et al, 2001).
According to them, competition can be researched from various angles. First it
is important to establish the incidence of competition i.e. is there competition in
the banking industry in Ghana? A market with several suppliers makes
collusion (anti-competitive behaviour) difficult to enforce (Korsah et al, 2001).
To them (quoting Oster, 1995), where firms are similar in size, competition
increases because none of them can dictate the market. Therefore Herfindahl-
Hirschman Index (HHI) is a concentration measure that can be used as a tool
for assessing the incidence of competition. The Herfindahl-Hirschman Index
(HHI) is calculated as the sum of the squared market shares of all banks in the
sector. That is
k
HHI=ΣkMS2i,
1=i
Where, MSi is the bank’s market share and k represents the number of banks in
the banking industry.
In the case of a monopoly, when one firm has 100 percent of the market share,
the HHI will be equal to 10,000, which is the upper bound. The lower bound of
zero is attained when the market is perfectly competitive. Therefore, the larger
the HHI, the more concentrated the market becomes, since fewer firms control
more of the market. A market with HHI in excess of 1800 is generally
considered as highly concentrated and adverse effects can be presumed.
131
However, the relationship between concentration and market structure has been
an area of considerable debate among the structuralists. The discourse is
centred on two competing hypothesis: the “structure-conduct performance”
(SCP) hypothesis and the “contestability” hypothesis. These details have been
explained in chapter two.
Tables 4.1a and 4.1b show year on year Herfindahl indexes from 1989 to 1997
and 1998 to 2005 with average figures from 1989-1997 and 1998 to 2005.
Based on the competitive model, we expected that competition in the banking
industry should have increased with the implementation of financial sector
adjustment programme (FINSAP) in Ghana over the period. Contrary to this
competitive model expectation, after the implementation of FINSAP, the
banking industry though seems to be competitive the level of competition is
very weak indicating weak oligopolistic nature in the area of deposits and loans
as shown in table 4.1a and 4.1b.
The tables show that the level of competition is not very intense especially in
the advances market. It appears competition is becoming more intense in
deposit, interest income and commission/fees markets than advances. Deposit
market appears to be more competitive because the customer base at the
corporate level is very small and all banks are chasing these few corporates.
The low level of competition in the loan market may be due to the high risk
inherent in the economy especially during the 1990s and early 2000. Banks
were therefore investing most of their excess funds in treasury bills which was
132
virtually risk free and offered attractive return (for instance, returns on T-Bills
in1999 were over 41%).
Table 4.1a Level of Competition - HHI Index 1989 - 1997 Year Advances Deposits Interest Income Commission/Fees
1989 1,694 3,207 2,348 2,784
1990 1,925 2,900 2,869 1,614
1991 1,272 3,064 2,034 1,382
1992 1,449 2,177 1,763 1,363
1993 1,326 3,142 1,534 1,343
1994 1,337 2,154 1,816 1,303
1995 1,144 1,497 1,531 1,355
1996 1,183 1,518 1,391 1,458
1997 1,265 1,489 1,334 1,625
Average 1988-1997 1,450 2,592 1,985 1,592
Table 4.1 b Level of Competition - HHI Index 1998 - 2005 Year Advances Deposits Interest Income Commission/Fees
1998 1,551 1,502 1,397 1,440
1999 1,626 1,464 1,375 1,430
2000 1,661 1,452 1,403 1,464
2001 1,829 1,365 1,518 1,317
2002 1,156 1,258 1,403 1,300
2003 1,235 1,225 1,229 1,244
2004 1,155 1,168 1,091 1,164
2005 1,042 1,051 1,000 1,191
Average 1998-2005 1,407 1,311 1,302 1,319
133
Fig 4.4: HHI Index for Deposits & Advances (1998-2005)
0
500
1,000
1,500
2,000
1998 1999 2000 2001 2002 2003 2004 2005
Year
HH
I
Advances Deposits
Fig 4.3: HHI Index for Advances & Deposits (1989-1997)
0 500
1,000 1,500 2,000 2,500 3,000 3,500
1989 1990 1991 1992 1993 1994 1995 1996 1997 Year
HHI Advances Deposits
Fig 4.2: HHI Index for Interest Income & Commission/Fees (1989-1997)
0
1,000
2,000
3,000
4,000
1989 1990 1991 1992 1993 1994 1995 1996 1997
Year
HH
I
Interest Income Commission/Fees
134
Fig 4.5: HHI Index for Interest Income & Commission/Fees (1998-2005)
0200400600800
1,0001,2001,4001,600
1998 1999 2000 2001 2002 2003 2004 2005
Year
HH
I
Interest Income Commission/Fees
In terms of bank classification by size, there exists more competition among the
small banks than in the big and medium banks in all the markets as shown by
the HHI in tables’ 4.2a-4.2c below. The low competition within the big banks is
due to the inability of the medium and small banks (with the exception of
Ecobank) to penetrate deeply into the market which has been dominated by the
big banks over the years particularly, GCB, SCB, and BBG. The high
concentration within the medium banks is due to the dominance of Ecobank in
that group. Ecobank has been experiencing tremendous growth in recent times
due to its ECOWAS connections, public image and superior marketing
strategy. For instance as at 2005, Ecobank had 32.1%, 43.7%, 37.2%, and
49.0% market share of advances, deposits, interest income and
commission/fees respectively within the medium-sized bank group. The high
level of competition within the small banks’ category may be partly due to the
struggle for survival and the entry of new banks in the industry.
Notwithstanding, CAL, PBL and SBL are relatively dominant in this group.
135
Table 4.2a Level of Competition - HHI Index (1998 - 2005) : Big Banks (GCB,SCB,BBG,SG-SSB and ADB)
Year Advances Deposits Interest
Income
Commission/Fee
s
1998 2,243 2,312 2,224 2,112
1999 2,326 2,350 2,230 2,140
2000 2,377 2,311 2,173 2,261
2001 2,671 2,281 2,315 2,105
2002 2,097 2,246 2,363 2,065
2003 2,196 2,221 2,248 2,121
2004 2,309 2,282 2,244 2,119
2005 2,203 2,272 2,233 2,076
Average 1998-2005 2,303 2,284 2,254 2,125
Computed by author
Table 4.2 b Competition - HHI Index (1998 - 2005) : Medium Banks (MBG,EBG,TTB and NIB)
Year Advances Deposits Interest
Income
Commission/Fees
1998 2,989 3,372 2,810 3,197
1999 2,787 3,493 2,910 3,319
2000 3,117 3,439 2,858 4,157
2001 2,949 3,454 2,862 3,866
2002 3,062 3,333 2,905 4,070
2003 2,921 3,168 2,668 3,779
2004 2,836 2,834 2,664 3,288
2005 2,749 3,087 2,739 3,334
Average 1998-2005 2,926 3,273 2,802 3,626
Computed by Author
136
Table 4.2 c Competition - HHI Index (1998 - 2005) : Small Banks (SBL, ABL, UNIBANK, MAB, PBL, ICB, HFC, CAL, FAMB, STTB)
Year Advances Deposits
Interest
Income Commission/Fees
1998 2,350 2,377 2,175 2,730
1999 2,840 2,280 2,152 3,308
2000 2,475 2,166 2,010 2,799
2001 2,259 1,847 1,853 2,082
2002 1,999 1,533 1,552 1,687
2003 1,609 1,329 1,418 1,549
2004 1,521 1,392 1,390 1,494
2005 1,452 1,278 1,333 1,340
Average 1998-2005 2,063 1,775 1,735 2,124
Fig 4.6: HHI Index 1998-2005
-
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
Advances Deposits Int. Inc Com/Fees
Variable
HH
I
Big Banks Medium Banks Small Banks
Though there seem to be little competition within bank classification by size, as
discussed above, there exist intense competition among interbank categories as
the big banks are losing market share to the medium and small banks
137
particularly in key market segments such as advances, deposits and profit after
tax.
In the advances market, the share of the big banks dropped by 18.4% between
1998 and 2005. With the exception of BBG that increased it market share of
advances from 12.7% to 17.3% during that period, all the others banks in this
category experienced decline in market share (GCB was able to maintain its
market share) and this was taken by the medium and small banks with shares of
7.7% and 10.7% respectively. The data suggests that EBG (in the medium bank
group) and PBL (in the small bank category) where the main gainers (see chart
4.7 and table 4.3 below).
Fig 4.7: Competition among Bank Groups - Advances Market
0.010.020.030.040.050.060.070.080.090.0
1998 1999 2000 2001 2002 2003 2004 2005
Period
Mar
ket S
hare
%
Big Banks Medium Banks Small Banks
138
Table 4.3: Competition in the Banking Industry- Advances Market
Market Share of Advances- Big Banks 1998 1999 2000 2001 2002 2003 2004 2005 GCB 16.8 17.4 21.9 34.2 16.2 19.7 18.7 16.1 SCB 26.8 28.9 27.7 16.7 15.7 15.9 14.6 13.6 BBG 12.7 11.7 10.3 12.9 17.4 17.9 18.4 17.3 SG-SSB 10.5 10.8 10.4 7.6 9.8 8.4 6.6 7.8 ADB 14.5 13.3 11.6 10.1 10.8 9.7 7.5 7.9 TOTAL 81.1 82.1 81.9 81.5 70.0 71.6 66.0 62.7 Market Share of Advances- Medium Banks 1998 1999 2000 2001 2002 2003 2004 2005 TTB 1.5 1.7 1.3 1.4 2.0 2.0 2.0 2.8 MBG 6.0 5.0 4.2 3.9 4.6 4.1 5.8 7.1 EBG 3.2 3.9 6.0 5.0 7.9 7.0 6.2 7.4 NIB 4.8 3.4 2.6 2.6 3.6 4.2 7.0 5.7 TOTAL 15.3 14.0 14.2 12.9 18.1 17.4 20.9 23.0 Market Share of Advances- Small Banks 1998 1999 2000 2001 2002 2003 2004 2005 SBL 0.01 0.2 0.2 0.4 1.2 1.8 1.6 ABL 0.03 0.2 0.4 0.5 0.7 0.7 UNIBANK 0.1 0.3 0.3 0.4 0.6 MAB 0.7 0.8 0.7 0.7 0.6 0.4 0.4 0.4 PBL 0.8 0.2 0.7 1.2 1.9 1.6 2.6 3.0 ICB 0.2 0.2 0.1 0.2 0.3 0.4 0.6 0.6 HFC 3.8 2.4 2.1 1.9 STAND. TRUST 0.4 CAL 1.1 1.6 1.5 2.1 2.6 2.5 2.7 2.5 FAMB 0.7 1.0 0.7 0.9 1.5 1.8 1.9 2.5 Total 3.5 3.9 3.9 5.7 11.9 11.0 13.2 14.2
NB: Shaded years means that those banks have not yet started business
Competition among Bank Groupings- Advances Market 1998 1999 2000 2001 2002 2003 2004 2005 Big Banks 81.1 82.1 81.9 81.5 70.0 71.6 66.0 62.7 Medium Banks 15.3 14.0 14.2 12.9 18.1 17.4 20.9 23.0 Small Banks 3.5 3.9 3.9 5.7 11.9 11.0 13.2 14.2 Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Source: Calculated from Audited Accounts of Banks
In the deposit market, the situation is not different. The 5 big banks lost 16.2%
of the market share of deposits during 1998-2005 with the biggest losers being
SCB (9.4%), and SG-SSB (6.2%); only ADB increased its market share by
139
2.1% during the period. While the share of the big banks fell by 16.2%, the
medium and small banks gained 5.4% and 10.8% respectively mainly on
account of better performance by NIB, SBL, PBL, and EBG (see table 4.4 and
Fig 4.8).
Table 4.4: Competition in the Banking Industry- Deposits Market Market Share of Deposits- Big Banks
1998 1999 2000 2001 2002 2003 2004 2005 GCB 20.9 18.3 22.3 19.6 20.0 19.5 20.7 19.2 SCB 22.6 22.9 19.7 18.6 18.1 17.2 16.0 13.2 BBG 15.3 17.3 17.7 19.6 16.3 17.0 15.3 14.2 SG-SSB 13.4 10.9 9.2 8.7 8.5 7.7 7.7 7.3 ADB 5.3 5.1 7.0 7.3 8.1 9.3 7.8 7.4 Total 77.5 74.5 75.9 73.7 70.9 70.7 67.5 61.3
Market Share of Deposits- Medium Banks 1998 1999 2000 2001 2002 2003 2004 2005 TTB 1.9 2.4 2.4 2.5 2.5 2.4 2.5 2.3 MBG 4.6 5.8 5.2 5.0 5.2 4.9 5.2 5.7 EBG 8.8 10.5 8.8 8.9 8.6 7.8 7.3 10.2 NIB 2.7 2.4 1.7 1.7 1.9 2.3 4.2 5.1 Total 18.0 21.2 18.1 18.1 18.2 17.3 19.1 23.3
Market Share of Deposits- Small Banks 1998 1999 2000 2001 2002 2003 2004 2005 SBL 0.02 0.4 0.7 1.6 1.9 2.6 2.6 ABL 0.1 0.3 0.7 1.6 1.6 1.4 UNIBANK 0.2 0.3 0.5 0.5 0.6 MAB 0.5 0.6 0.6 0.7 1.0 0.7 0.6 0.6 PBL 1.1 0.9 1.1 1.6 1.9 1.9 2.4 2.9 ICB 0.4 0.4 0.4 0.6 0.8 1.0 1.2 1.5 HFC 0.3 0.7 0.8 1.1 STAND. TRUST 0.7 CAL 1.4 1.4 1.7 2.4 2.5 2.2 2.3 2.5 FAMB 1.1 1.0 1.7 1.7 1.9 1.5 1.2 1.4 Total 4.5 4.4 5.9 8.2 10.9 11.9 13.4 15.4
NB: Shaded years means that those banks have not yet started business
Competition among Bank Groupings- Deposit Market 1998 1999 2000 2001 2002 2003 2004 2005 Big Banks 77.5 74.5 75.9 73.7 70.9 70.7 67.5 61.3 Medium Banks 18.0 21.2 18.1 18.1 18.2 17.3 19.1 23.3 Small Banks 4.5 4.4 5.9 8.2 10.9 11.9 13.4 15.4 Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Source: Calculated from Audited Accounts of Banks
140
Fig 4.8: Competition among Bank Groups-Deposit Market
0.0
20.0
40.0
60.0
80.0
100.0
1998 1999 2000 2001 2002 2003 2004 2005
Period
Mar
ket S
hare
%
Big Banks Medium Banks Small Banks
In the area of profit after tax, the big banks again lost market share mainly to
the medium banks, particularly EBG, NIB, and TTB during the period 1998-
2005. The big banks lost 8% market share in profit after tax with all banks in
the group experiencing falling market shares with the exception of BBG that
gained 12.1% by increasing share of profit after tax from 11.3% in 1998 to
23.4% in 2005 (see fig. 4.9 and table 4.5). While the big banks lost 8% market
share of profit after tax during the period, the medium banks gained 7.1%,
spearheaded mainly by EBG and NIB. The small banks were able to gain only
1% possibly due to the fact that most of the banks in this group are relatively
new in the industry and are yet to recover investment costs hence lower
profitability. It might partly be due to the fact the small banks are less
capitalised due to their low equity base.
141
Fig 4.9: Competition among Bank Groups - Proft After Tax
0.0
20.0
40.060.0
80.0
100.0
1998 1999 2000 2001 2002 2003 2004 2005
Period
Mar
ket S
hare
%
Big Banks Medium Banks Small Banks
Table 4.5: Competition in the Banking Industry- Profit After Tax Market Share of Profit After Tax- Big Banks
1998 1999 2000 2001 2002 2003 2004 2005 GCB 13.9 19.0 20.0 22.4 24.2 11.0 14.0 11.2 SCB 29.1 24.2 16.6 14.4 18.1 21.1 16.3 20.2 BBG 11.3 14.9 18.4 22.5 22.7 25.2 22.4 23.4 SG-SSB 12.7 12.2 11.1 12.2 9.9 10.4 9.0 8.1 ADB 10.5 11.8 14.4 14.0 9.0 9.3 9.3 6.5 Total 77.4 82.1 80.4 85.4 84.0 76.9 70.9 69.4
Market Share of Profit After Tax- Medium Banks 1998 1999 2000 2001 2002 2003 2004 2005 TTB 1.8 1.3 1.5 1.6 1.7 2.3 3.1 3.9 MBG 7.0 4.7 2.0 2.9 1.5 1.9 5.1 5.6 EBG 7.3 6.4 6.1 6.5 6.6 7.1 7.4 10.4 NIB 1.9 2.9 6.2 1.9 2.8 3.9 4.4 5.1 Total 18.0 15.4 15.9 12.9 12.7 15.2 20.0 25.1
Market Share of Profit After Tax- Small Banks 1998 1999 2000 2001 2002 2003 2004 2005 SBL -1.3 0.2 0.2 0.4 1.0 1.0 1.4 ABL -0.2 0.1 0.2 0.2 0.5 0.4 UNIBANK -0.6 -0.3 0.1 0.1 0.1 MAB 0.7 0.3 0.2 -0.6 -2.6 -0.2 0.1 0.1 PBL 0.5 0.4 0.4 0.6 0.9 1.4 1.5 2.0 ICB 1.0 0.5 0.3 0.4 0.4 0.5 0.6 0.8 HFC 1.2 2.1 1.5 0.7 STAND. TRUST -3.2 CAL 1.6 2.1 2.3 1.3 2.6 2.5 2.9 2.3 FAMB 0.8 0.4 0.5 0.2 0.4 0.2 0.6 0.8 Total 4.5 2.5 3.7 1.7 3.3 7.9 9.1 5.5
NB: Shaded years means that those banks have not yet started business Competition among Bank Groupings- Profit After Tax
1998 1999 2000 2001 2002 2003 2004 2005 Big Banks 77.4 82.1 80.4 85.4 84.0 76.9 70.9 69.4 Medium Banks 18.0 15.4 15.9 12.9 12.7 15.2 20.0 25.1 Small Banks 4.5 2.5 3.7 1.7 3.3 7.9 9.1 5.5 Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Source: Calculated from Audited Accounts of Banks
142
4.1.2 Market Concentration
The second issue after the incidence of competition is to ascertain the intensity
of competition. Competition often intensifies with the entry of new entrants or
suppliers into a market that is not expanding proportionately. The market
concentration shows how competitive an industry is. If a market is very
competitive we expect the concentration ratio to be low as participants strive to
acquire a sizeable share of the market thus leading to efficiency. Tables 4.6a
and 4.6b show the market concentration of deposits and assets for the six major
banks from 1998 to 2005.
In terms of deposits, the share of the six major banks fell slightly from 86% in
1998 to 71 % in 2005. The six banks have held about 80% (on average) of total
deposits in the industry between 1998 and 2005. The picture is not different for
that of assets, where the share of the six banks decreased marginally from 85%
in 1998 to 70% (also 80% on average within the same period). The market
concentration of the six major banks points to oligopolistic competition and
indicates that the reforms have not generated enough competition in the
banking industry as the market is still dominated by the six banks. This means
that the new entrants into the banking industry have not been that competitive
in deposit mobilization. The banking industry therefore has enough
opportunities for growth and expansion.
143
Table 4.6a : Market Concentration - Deposit (1998-2005) % Bank 1998 1999 2000 2001 2002 2003 2004 2005
GCB 21 18 22 20 20 19 21 19
SCB 23 23 20 19 18 17 16 13
BBG 15 17 18 20 16 17 15 14
SG-SSB 13 11 9 9 8 8 8 7
EBG 9 11 9 9 9 8 7 10
ADB 5 5 7 7 8 9 8 7
TOTAL 86 85 85 83 79 78 75 71
Source : Calculated from Audited Accounts of Banks-Total number of banks=21
Table 4.6b : Market Concentration - Assets (1998-2005) % Bank 1998 1999 2000 2001 2002 2003 2004 2005
GCB 21 18 18 26 24 20 18 16
SCB 19 23 25 16 16 15 14 14
BBG 14 14 14 16 14 15 15 14
SG-SSB 13 11 10 9 9 8 8 8
EBG 8 9 8 7 7 7 8 9
ADB 10 10 10 10 10 12 10 9
TOTAL 85 84 86 84 80 77 73 70
Source : Calculated from Audited Accounts of Banks’
144
Fig 4.10 : Market Concentration of Deposits and Assets 1998-2005
0102030405060708090
100
1998 1999 2000 2001 2002 2003 2004 2005
Year
Con
cent
ratio
n (%
)
Deposits Assets
Fig 4.11 :Trend in Market share of assets of top 4 banks in Ghana (1988-1999)
0.00
10.00
20.00
30.00
40.00
50.00
60.00
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
GCB SCB B BG SSB
Figure 4.11 indicates zero sum game among the top four banks in the sense that
what the biggest bank (Ghana Commercial Bank –GCB) had lost since 1988,
the other three banks (SCB, BBG and SG-SSB) had gained. The market shares
of the rest of the banks have moved within a rather narrow band implying that
they have not made significant inroads by way of wrestling market share from
the top four banks.
145
Fig 4.12: Trend of Deposits of top 4 banks (1988-1999)
0.00
10.00
20.00
30.00
40.00
50.00
60.00
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
GCB SCB BBG SG-SSB
There is evidence of leader-follower tendencies among banks in the area of
product pricing. There seems to be very little price competition in the banking
industry in Ghana, as evidenced by the widening spread between deposits and
lending rates (table 4.7a depicts). The wide spread is attributed to the high
transaction cost due to the inefficiency of the banks in Ghana. Hence there is
no significant evidence of price wars among the banks in Ghana and therefore
the level of competition among banks is oligopolistic.
146
Table 4.7a : Decomposition of Interest Spread in Ghana
Dec-04 Dec-03 Dec-02 Dec-01 Dec-00
Interest Income 29.35 30.94 33.36 42.79 35.04
Cost of Funds 5.17 6.34 5.89 11.32 9.84
Total Spread 24.18 24.60 27.47 31.47 25.20
Overhead Cost 8.93 7.86 9.95 7.26 6.05
Loan Loss Provisions 2.93 3.72 4.36 5.86 3.85
Cost of Prim Reserve
Requirements 2.90 3.06 3.30 4.23 3.47
Taxation 3.29 3.49 3.45 4.94 4.14
Profit Margin 6.13 6.47 6.41 9.18 7.69
Source : Audited Accounts
The transaction costs ratio calculated as, Total Operating Costs over Total
Operating Income measures cost efficiency of a bank. The transaction costs
ratio shows the amount of resources spent to generate a unit of income. Table
4.7b shows that transaction cost ratio in the banking industry has been rising
since 2001. The ratio has risen from 36% in 2000 to 60% mainly due to rising
operating costs of banks particularly technology and staff cost. This can be
interpreted to mean dwindling efficiency in the operation of banks.
147
Table 4.7b : Trend Analysis of Cost Efficiency
1998 1999 2000 2001 2002 2003 2004 2005
Total Operating Costs
(¢'Bn)
340
433
679
973
1,262
1,749
2,201
2,938
Total Operating Income
(¢'Bn)
718
976
1,911
2,512
2,730
3,534
4,323
4,899
Tot. Op. Costs/Tot Op.
Inc. (%) 47% 44% 36% 39% 46% 49% 51% 60%
Source : Calculated from Audited Accounts of Banks'
Table 4.7c: Performance of 20 Banks in Ghana as at December, 2005 GCB SCB BBG SSB ADB NIB EBG MBG
Return on Assets (ROA) 2.2% 4.7% 6.1% 3.2% 2.0% 3.1% 3.7% 3.3%
Return on Equity (ROE) 18.6% 36.5% 41.6% 20.1% 10.8% 29.8% 36.8% 25.5%
PRODUCTIVITY
INDICATORS
No. of Employees 2188 604 711 704 934 572 304 477
Income per employee (¢'B) 0.43 1.13 1.07 0.60 0.40 0.33 1.27 0.54
Cost per employee (¢'B) 0.33 0.54 0.45 0.41 0.28 0.29 0.64 0.26
PBT per employee (¢'B) 0.11 0.59 0.59 0.21 0.07 0.15 0.59 0.21
Int Expense/ Int Income 16.7% 24.2% 15.5% 21.7% 31.9% 33.7% 29.4% 33.6%
Net Int Income / Total Income 74.8% 64.6% 70.0% 66.9% 60.2% 76.9% 62.3% 56.5%
Comm & Fess / Total Income 25.0% 25.1% 22.8% 34.3% 34.9% 19.8% 29.2% 27.0%
Op. Expense / Total Income 77.8% 47.9% 41.5% 67.7% 69.3% 89.7% 50.1% 48.2%
Bad Debt / Total Loans 2.9% 1.4% 2.9% 0.7% 5.1% 6.9% 1.4% 3.1%
Shareholders Funds/Total Assets 11.9% 12.7% 14.7% 15.8% 18.4% 10.3% 10.2% 13.1%
Shareholders Funds/Total Loans 27.4% 30.3% 22.1% 37.2% 49.7% 26.7% 27.2% 21.3%
Bad Debt / Total Income 7.9% 4.5% 10.1% 2.1% 17.2% 33.9% 4.2% 13.9%
Source: Calculated from Audited Accounts
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Table 4.7c ctd: Performance of 20 Banks in Ghana as at December, 2005 CAL FAMB TTB PBL ICB SBL ABL HFC MAB UNI STB ZIB
Return on Assets (ROA) 3.0% 2.8% 4.6% 2.2% 2.0% 1.8% 0.9% 1.5% -0.2% 0.4% -12.6% -4.9%
Return on Equity (ROE) 16.1% 28.7% 38.8% 35.9% 12.5% 14.3% 11.4% 9.0% -2.8% 3.0% -66.1% -6.5%
Productivity Indicators
No. of Employees 199 138 247 445 128 118 99 173 137 93 156 64
Income per employee (¢'B) 60.2% 66.0% 60.4% 26.3% 33.1% 90.7% 41.2% 33.2% 1.5% 31.4% 13.2% 4.2%
Cost per employee (¢'B) 33.2% 40.0% 30.3% 17.9% 18.6% 52.4% 30.1% 28.6% 1.6% 25.8% 35.4% 14.5%
PBT per employee (¢'B) 23.3% 17.4% 27.5% 6.9% 10.3% 23.9% 6.0% 6.2% -0.2% 0.9% -23.0% -10.4%
Int Expense/ Int Income 38.7% 50.2% 33.8% 45.2% 52.2% 36.3% 56.4% 48.0% 34.1% 37.9% 29.7% 2.8%
Net Int Income / Total
Income 68.5% 72.8% 64.6% 65.7% 72.4% 55.5% 60.6% 88.6% 58.2% 57.0% 51.5% 86.1%
Comm & Fess / Total
Income 24.1% 20.7% 34.8% 28.7% 18.7% 28.4% 39.4% 11.4% 33.6% 36.3% 47.6% 7.8%
Op. Expense / Total
Income 55.2% 60.6% 50.2% 67.9% 56.2% 57.8% 73.0% 86.2% 108.7% 82.3% 268.6% 342.4%
Bad Debt / Total Loans 3.3% 5.0% 2.5% 1.5% 7.3% 6.8% 4.9% 1.2% 0.1% 5.3% 1.8% 1.0%
Shareholders Funds/T.
Assets 18.4% 9.7% 11.9% 6.2% 16.2% 12.8% 8.1% 16.6% 5.5% 12.2% 19.1% 75.6%
Shareholders
Funds/T.Loans 44.8% 20.7% 25.7% 13.0% 75.5% 42.8% 30.3% 38.1% 14.8% 28.4% 81.0% 1231.8%
Bad Debt / Total Income 10.8% 22.0% 7.6% 6.0% 16.9% 16.8% 13.0% 6.2% 4.3% 16.9% 5.7% 3.1%
Source: Calculated from Audited Accounts
4.2 Panzar and Rosse’s H-Statistics
Results of recent study by Buchs and Mathisen (2005) on “Competition and
Efficiency in Banking: Behavioural evidence from Ghana” which employed the
Penzar and Rose framework was adopted for this work. They used annual
individual bank balance sheets and income statements from 20 banks operating
during 1998-2003. Their findings on market structure as shown in table 4.8
suggest that the Ghanaian banking sector is characterised by monopolistic
competition according to the Panzar and Rosse classification. Their findings
lies between 0 and 1 but much lower than other comparable African countries.
149
This means that competition in the Banking industry in Ghana is not as strong
as other comparable African countries. As was highlighted in chapter three, the
wider interest rate spread in Ghana is an indication of weak industry
competition.
Table 4.8: H-Statistics Values for Banking System in Ghana
All
Specifications
Unscaled
Specification
Scaled
Specification
Average H-Statistic 0.555 0.627 0.482
Median H-Statistic 0.569 0.626 0.481
Standard Deviation 0.092 0.038 0.064
Source: Buchs and Mathisen, 2005-Competition and Efficiency in Banking: Behaviural evidence from Ghana. The H-Statistics were computed at 5% level of significance
Table 4.9: Banking Sector Market Structure in Selected Countries
Country Period H-Statistic No. of
banks
No. of
observations
Ghana 1998-2003 0.56 13 65
Sub-Saharan Africa 1994-2001 0.58 34 106
Nigeria 1994-2001 0.67 42 186
South Africa 1994-2001 0.87 45 186 Source: Buchs and Mathisen, 2005
From table 4.9 above, it appears South Africa banking industry is more
competitive than any of the comparable African countries followed by Nigeria.
Interest rate spread in Ghana is much wider as depicted in table 4.10 below and
emphasized in Chapter Three. Other countries operate with much narrower
margins.
150
Table 4.10: International Comparison of Selected Banking and Institutional Indicators (In percent, unless otherwise indicated as at 2003)
Ghana Kenya Mozambique Nigeria
South
Africa Tanzania Uganda Zambia
SSA
Average
Size of Financial Intermediaries
Private Credit to GDP 11.8 26.8 16.7 14.4 147.2 4.9 4.0 7.5 15.2
M2 to GDP 19 43.8 5.1 25.8 87.2 18.3 13.0 16.9 24.8
Currency to GDP 10.5 13.2 15.6 10.8 28.4 8.5 8.8 6.4 13.9
Banking Industry
Number of Banks 17 53 10 51 60 29 15 16 -
Net Interest Margin 11.5 5.0 5.9 3.8 5 6.5 11.6 11.4 8.3
Overhead Costs 7.3 3.7 4.5 7.4 3.7 6.7 4.6 11.2 5.7
Foreign bank share (asset) 53 4.8 98 11 0.6 58.7 89.0 66.6 -
Bank concentration (3 banks) 55.0 61.6 76.6 86.5 77 45.8 70.0 81.9 81.0
Non performing loans (share of total
loans) 28.8 41 - 17.3 3.9 12.2 6.5 21.8 -
Capital markets
Stock Market Capitalisation (% of
GDP) 10.1 9.2 - 10.9 77.4 4.3 0.6 6 21.3
Contract enforcement
Number of Procedures 21 25 18 23 16 26 14 1 29
Duration (Number of Days) 90 255 540 730 99 207 127 188 334
Bankruptcy
Time in Years - 4.6 - 1.6 2.0 3.0 2.0 3.7 3.5
Credit Market
Credit Rights Index (0 is weakest) 1 1 3 1 2 3 1 2 2
Entry Regulations
Number of Procedures 10 11 16 9 9 13 17 6 11
Duration (number of days) 84 61 153 44 38 35 36 40 72
Cost (percent of GNI per capacity) 111 54 100 92 135 9 199 24 255
Source: IMF, International Finance Statistics; Bank Scope; World Bank, World Development Indicators; Doing Business Indicators Database; “Tanzania Financial System Stability Assessment” IMF Staff Country Report No 03/241. Washington D.C IMF (2003). Banking Statistics and Capital market indicators are for 2001. All institutional indicators are for 2003
151
4.3 Concentration and Performance
Testing concentration and performance, we used Spearman’s Rank Correlation
Matrix to determine the relationship between concentration and performance.
For the performance measure we are either using return on equity (ROE) and
return on assets (ROA) and for concentration we used the 5-bank deposit
market concentration. We tabulate the relationship between market
concentration and profitability as follows:
Table 4.11:- Spearman rank correlation coefficient (Concentration & Performance) ROA ROE 5BDCR
ROA 1.00
ROE (0.13) 1.00
5BDCR (0.31) 0.38 1.00
(5BDCR=5 Bank Deposit Market Concentration)
Table 4.11 a weak relationship between concentration and the two profitability
indicators. Our findings does suggest that the basic notion that bank
concentration results in monopoly profits cannot be confirmed by empirical
evidence in Ghana, since the coefficients are not significant.
4.4 Bank Size and Performance
4.4.1 Regression Analysis
Alhadeff and Alhadeff (1964) compared the growth of the top 200 banks in the
US over the period 1930-60 to the growth of total bank assets. They found that
the top 200 banks grew more slowly than the total did. Within the top 200, the
152
bottom segment grew more rapidly than the top, but showed greater variance in
growth rates. Rhoades and Yeats (1984) replicated this study for the period
1960-71. They too found that the largest banks grew less than the system as a
whole. This points to de-concentration in banking. Scholtens (2000) also
confirms that profit growth is inversely related to size when bank size is
measured by assets. Scholtens (2000) findings saw profit growth positively
correlated with equity. His findings indicated the utmost importance of bank
soundness, rather than asset size, for sustainable bank performance. In this
research work we follow the same hypothesis of Scholtens (2000) for the
banking industry in Ghana as we want to find out whether profit (performance
of banks in Ghana) is related to bank size.
H1: The profit growth of banks is not related to the size
H2: The profit of banks is related to their size.
4.4. 2 Data
The data cover the period from 1988 to 2005. The main data sources are the
annual reports and accounts for the financial institutions particularly the 21
major banks in Ghana. The financial sector reforms in Ghana started in 1998.
This is why we decided to use the period 1988 to 2005. The pre reforms period
data is scarcely available. These financial institutions are Ghana commercial
Bank, Barclays Bank of Ghana, Standard Chartered Bank Ghana, Merchant
Bank Ghana, Ecobank Ghana, Agricultural Development Bank, National
Investment Bank, SG-SSB Bank, CAL Bank, The Trust Bank, Amalgamated
153
Bank, Prudential Bank, Stanbic Bank Ghana, Unibank Limited, First Atlantic
Merchant Bank, Home Finance Company Bank, Standard Trust Bank Ghana,
International Commercial Bank and Metropolitan and Allied Bank.
With respect to the characteristics that might affect profit growth (GPAT) with
a bank, we investigate bank assets and bank capital (equity or shareholders
fund which indicates the strength of a bank). Bank assets are the traditional size
indicator of a bank and this forms the basis of our hypothesis while the equity
indicates the strength of a bank. We calculated the growth rates of assets and
equity during 1988-2005.
We estimate the following growth equation based on other studies (Alhadeff
and Alhadeff, 1964; Rhoades and Yeats, 1974; Tschoegl, 1983; Akhaveln et.al,
1977 and Scholtens, 2000).
π = β0 + β1 (GASSET) + β2 (GEQUITY) + εt (1)
Where
π = Growth in Profit after tax of banks.
GASSET = Growth in bank assets. The basic assumption is that being big
is a relative advantage that might result in a further rise in profit.
On the other hand we have to do with basic statistic property of
large numbers in that the growth rate declines with size.
Therefore we expect to find profit growth to become smaller
with a bigger size of the bank as measured by the amount of
assets. Thus, with bank profits and bank assets, it is clear that H1
154
tends to be confirmed, whereas H2 is not. This might either be
due to decreasing economies of scale or simply results from
basic statistical properties of large numbers. Therefore the
relationship may be positive, reflecting economies of scale, or
negative, reflecting greater ability to diversify assets, which
results in lower risk and lower required return (β3>0 or β3<0).
GEQUITY = Growth in networth. We expect profit growth increases with
the growth in equity (size of tier-one capital). This implies that
healthier banks report better profit performance than banks that
are less endowed with tier-one capital hence the expected sign
β2>0. Furthermore, the result leads to the confirmation of H1,
whereas H2 is not confirmed.
155
4.4.3 Results and Analysis of Regression
Table 4.12 Summary of Regression results SUMMARY OUTPUT Dependent variable : Growth PAT
Regression Statistics
Multiple R 0.90
R Square 0.81
Adjusted R Square 0.78
Standard Error 52.11
Observations 16
ANOVA
df SS MS F
Regression 2 151,373 75,686 27.8777
Residual 13 35,294 2,715
Total 15 186,667
Coefficients
Standard
Error t Stat P-value
Intercept -11.9 30.9 -0.4 0.7
Growth in Equity 0.8 0.1 7.5 0.0
Growth in Asset 0.8 0.8 1.0 0.3
The results in table 4.8 above show that growth in equity is statistically
significant while asset growth which indicates the size is not significant at 5%
level. The regression analysis shows that profitability and asset growth are
statistically insignificant. The only variable that explains bank profitability is
the growth in equity.
156
To be able to confirm our regression analysis we computed share of assets,
return on equity and assets from audited accounts of 5 top banks, 3 medium
banks and 1 small bank. The computed figures assisted us to affirm our
regression results. We provide the computed figures as follows:
Table 4.13a: A Share of Assets of some Selected Banks (5 Big, 2 Medium and 1 small)
1998 1999 2000 2001 2002 2003 2004 2005
GCB 21% 18% 18% 26% 24% 20% 18% 16%
SCB 19% 23% 25% 16% 16% 15% 14% 14%
BBG 14% 14% 14% 16% 14% 15% 15% 14%
SG-SSB 13% 11% 10% 9% 9% 8% 8% 8%
EBG 8% 9% 8% 7% 7% 7% 8% 9%
ADB 10% 10% 10% 10% 10% 12% 10% 9%
MBG 5% 6% 4% 4% 4% 4% 5% 5%
TTB 2% 2% 2% 2% 2% 2% 3% 3%
Source: Computed from the audited accounts
157
Table 4.13b: ROE of some Selected Banks 9 (5 Big, 2 Medium and 1 small) 1998 1999 2000 2001 2002 2003 2004 2005
GCB 24% 44% 61% 51% 40% 20% 27% 18%
SCB 77% 63% 60% 52% 47% 44% 43% 36%
BBG 45% 59% 87% 82% 54% 55% 52% 50%
SG-SSB 33% 33% 46% 42% 28% 27% 29% 23%
TTB 28% 24% 45% 40% 34% 41% 52% 45%
MBG 37% 36% 15% 24% 12% 16% 32% 24%
EBG 40% 44% 31% 28% 41% 44% 43% 43%
ADB 24% 28% 43% 32% 17% 17% 20% 12%
INDUSTRY 36% 39% 50% 42% 33% 30% 32% 22%
Source: Computed from the audited accounts
Table 4.13c: ROA of some Selected Banks 9 (5 Big, 2 Medium and 1 small) 1998 1999 2000 2001 2002 2003 2004 2005
GCB 3% 5% 6% 4% 4% 2% 3% 2%
SCB 7% 5% 4% 5% 4% 5% 4% 5%
BBG 4% 5% 7% 7% 6% 6% 6% 5%
SG-SSB 5% 5% 6% 7% 4% 4% 4% 3%
TTB 5% 3% 4% 4% 3% 3% 4% 5%
MBG 7% 4% 3% 4% 1% 2% 4% 3%
EBG 5% 3% 4% 5% 4% 4% 4% 4%
ADB 5% 6% 8% 7% 4% 3% 4% 2%
INDUSTRY 5% 5% 6% 5% 4% 3% 4% 3%
Source: Computed from audited accounts
158
Ghana Commercial Bank (GCB) the largest bank in Ghana with an average
market share of more than 20% saw its profit performance declining from 2000
to 2005. TTB, one of the small/medium banks in Ghana saw its profit
performance improving from 2000 to 2005. Therefore Tables 4.13 a, b and c
seem to indicate that size does not matter in performance. Small/medium bank
like TTB is more profitable than Ghana Commercial Bank (GCB), the biggest
bank in Ghana. The tables (4.13a-c) confirm our regression results. We
therefore accept the hypothesis (H1) that size is not related to profit
performance (and reject H2). Our empirical results seem to suggest that size is
unrelated to profit performance in the banking industry in Ghana.
4.5 CAMEL Framework
This section uses the CAMEL approach to analyse capitalization, asset quality,
solvency, profitability, efficiency and liquidity in the banking industry.
4.5.1 Capital Adequacy Ratio (CAR)
This ratio measures the solvency state of a bank. It is measured by Equity (i.e.
Shareholders’ funds) as a percentage of total assets. The new Banking Act 2004
(Act 673) requires all banks to maintain a minimum ratio of total capital to risk-
weighted assets of 10 percent at all times. The higher the CAR, the higher the
level of protection available to depositors and the more solvent the industry.
Table 4.14a : Trend Analysis of CAR %
1989 1990
1990
-'95
1996
-'99 2000 2001 2002 2003 2004 2005
Capital
Adequacy
Ratio
(4.6) 10.9
12.3
12.7 11.1 12.5 11.6 11.0 11.9 12.5
Source : Calculated from Audited Accounts of Banks'
159
Industry CAR has risen significantly from negative 4.6% in 1989 to 10.9% in
1989. It averaged 12.3% and 12.7% between 1990-1995 and 1996-1999
respectively and as at end-December 2005 it stood at 12.5%. The increase in
CAR in 2005 was largely the result of the revised mode of calculation of the
capital adequacy ratio stipulated in the new Banking Act, 2004, Act 673, which
frees more capital for banks in risk assumption. There has also been an increase
in networth as banks injected more capital to meet the new minimum capital
requirement of ¢70.00 billion to do banking business. Besides, the new entrants
especially from Nigeria have increased their stated capital above the required
minimum. At the end of year 2005, all the major banks complied with the
statutory minimum capital adequacy ratio of 10.0%, however few banks
maintained thin covers in excess of the statutory requirement.
In terms of bank groupings, it appears that GCB, ADB and SG-SSB are well
capitalised in the “big banks’ category. SCB and BBG however maintained just
a thin cover. In the medium banks’ category, NIB is well capitalised followed
by MBG with EBG and TTB in that order. Within the small banks, ICB and
SBL topped the group with a CAR of 26.3% and 24.6% respectively. PBL
appears to be the least capitalised bank. On the average, the big banks seem to
be well capitalised though there are much variations in terms of bank by bank
comparison. The CAR for banks in the “small banks” group appear to be very
high possibly due to the fact that most of these banks particularly, SBL and
ICB are relatively new in the industry with lower assets base.
160
Table 4.14b: Capital Adequacy = Equity/Total Assets (%) Big Banks 1998 1999 2000 2001 2002 2003 2004 2005 Average
GCB 13.2 11.5 10.0 8.7 9.4 9.3 10.7 12.3 10.7
SCB 9.6 7.8 6.1 9.1 9.3 10.6 10.1 12.6 9.4
BBG 9.0 8.6 8.5 9.0 11.2 10.3 10.7 10.9 9.8
SG-SSB 14.8 16.2 13.9 16.1 15.1 15.6 15.1 13.6 15.1
ADB 20.5 20.4 18.1 22.6 21.1 15.5 18.1 18.1 19.3
Average Big Banks 13.4 12.9 11.3 13.1 13.2 12.3 12.9 13.5
Medium Banks
MBG 19.0 10.8 16.5 15.5 11.8 10.2 13.2 13.5 13.8
EBG 11.6 7.9 13.2 17.8 8.7 8.1 8.7 8.7 10.6
TTB 17.7 13.0 8.8 9.4 7.8 7.6 8.0 10.3 10.3
NIB 17.7 18.9 27.5 30.9 19.9 12.6 11.5 12.0 18.9
Average Medium
Banks 16.5 12.7 16.5 18.4 12.0 9.6 10.3 11.1
Small Banks
SBL n/a 80.3 23.2 15.4 7.8 19.6 12.8 12.8 24.5
PBL 6.8 8.3 6.7 5.7 5.2 4.9 5.5 6.2 6.2
ICB 47.5 43.2 31.3 24.4 18.6 9.7 19.5 16.5 26.3
CAL 23.3 15.9 14.8 14.6 13.7 12.6 20.1 18.9 16.7
Average Small Bank 25.8 22.4 17.6 14.9 12.5 9.1 15.0 13.9 16.4
INDUSTRY 13.5 11.8 11.1 12.5 11.6 11.0 11.9 12.5
Source: Calculated from Audited Accounts of Banks'
161
4.5.2 Asset Quality
The quality of assets is measured by the provision ratio, non-performing loans
ratio (NPL) and the charge for bad and doubtful debts to net loans and
advances. This is an indicator of the “health” status of banks’. It is expected
that banks’ should be able to recover all debts. Failure to recover bad loans will
lead to poor quality assets, illiquidity and insolvency.
The quality of loans and advances of the banking industry has improved
tremendously over the years. This was reflected in a decline of the provision
ratio (provision for bad and doubtful debts to gross loans and advances) from
18.19% at end December 2002 to 15.36% at end December 2003 and further
down to 10.85% by end-December 2005. Similarly, the non-performing loans
ratio (calculated as the ratio of non-performing loans to total gross loans and
advances) also fell from 22.73% at end December 2002 to 12.95% by end-
December 2005. The level was however marginally above the prudentially
Fig 4.13: Capital Adequacy Ratio1989-2005
(10.0)
(5.0)
-
5.0
10.0
15.0
1989 1990 1990- '95
1996- '99
2000 2001 2002 2003 2004 2005
Period
%
162
acceptable limit of 10.00%. The improvement recorded in the quality of the
loan portfolio was largely explained by the expansion in the credit base of the
banking industry and to a lesser extent, recoveries.
Table 4.15a: Classification of Loans and Advances Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Classification
(¢bn) (¢bn) (¢bn) (¢bn) (¢bn)
Current n/a 4,960.61 8,002.06 10,380.32 15,029.03
Olem n/a 405.81 620.44 365.51 543.98
Substandard n/a 306.44 370.53 430.22 379.62
Doubtful n/a 399.69 581.33 572.93 628.47
Loss n/a 872.81 933.48 1,062.95 1,314.62
Total Gross Loans 6,275.10 6,945.36 10,507.84 12,811.93 17,934.12
Provisions 815.76 1,263.56 1,613.54 1,674.27 1,945.11
Provisions As % of Gross
Loans
13.00 18.19 15.36 13.07 10.85
Non-Performing Loans (NPL) 1,229.92 1,578.94 1,885.34 2,066.10 2,322.71
NPL as % Gross Loans 19.60 22.73 17.94 16.13 12.95
Growth in Loans 10.68 51.29 21.93 39.98
Growth in NPL 28.38 19.41 9.59 12.42
Source: Bank of Ghana
The charge for bad and doubtful debt to net advances ratio also show consistent
improvement in asset quality. A high ratio of bad debts provision to net loans
and advances is an indication of inefficiency in credit administration. The ratio
has fallen from as high as 57.3% in 1989 to 44.2 % in 1990. It averaged 26.4%
and 9% between 1990-1995 and 1996-1999 respectively. The health status of
banks witnessed deterioration between 2000 and 2002. The increase in bad
163
loans in this period were attributed to the prevailing adverse economic
conditions (high inflation, depreciation of the cedi and high interest rates)
making it difficult for most borrowers to pay back their loans. This trend has
however been reversed since 2003 with provision ratio improving to 3% in
2005. This reflects the rapid build-up of the loan asset book of banks in the past
few years and is also an indication of prudent management of banks’ credit
portfolios. The Ghanaian banking industry is thus becoming more solvent and
liquid.
Table 4.15b : Trend Analysis of Asset Quality %
1989 1990 1990-
95 1996-
99 2000 2001 2002 2003 2004 2005 Charge for Bad Debt/Net Advances
57.25 44.2
26.40
9.00
6.90
7.22
6.03
4.89 3.81 3.05
Source : Calculated from Audited Accounts of Banks'
Fig 4.14: Charge for Bad Debt/Net Advances
-
10.00
20.00
30.00
40.00
50.00
60.00
70.00
1989 1990 1990-95
1996-99
2000 2001 2002 2003 2004 2005
Period
%
In terms of asset quality, EBG is the best with an average ration of 1.1%
between 1998 and 2005 followed by BBG with 2%. NIB, ICB, SBL, and ADB
164
are the banks with worse asset quality with a ratio of 8.2%, 7.3%, 6.7% and 5%
respectively in 2005 (see table 4.15C below).
Table 4.15c: Asset Quality = Provision/Net Advances (%) Big Banks 1998 1999 2000 2001 2002 2003 2004 2005 Average
GCB 1.8 3.0 9.7 9.8 13.9 6.4 4.7 2.9 6.5
SCB 0.6 0.5 7.1 8.3 0.7 (1.0) 0.4 1.4 2.2
BBG 1.2 2.0 2.1 1.3 1.1 3.3 2.2 2.8 2.0
SG-SSB 3.0 3.8 3.6 7.4 6.4 7.5 3.0 0.7 4.4
ADB 3.2 4.6 8.2 10.9 13.4 11.0 12.2 5.0 8.6
Average Big Banks 2.0 2.8 6.1 7.5 7.1 5.4 4.5 2.5
Medium Banks
MBG 3.7 3.2 11.7 6.0 13.8 9.9 5.7 3.2 7.1
EBG 0.0 0.3 1.5 1.8 1.2 2.0 1.0 1.4 1.1
TTB 1.7 1.0 2.0 2.0 0.9 4.0 4.9 2.5 2.4
NIB 3.0 11.3 21.5 5.5 5.8 8.9 4.6 8.2 8.6
Average Medium
Banks 2.1 3.9 9.1 3.8 5.4 6.2 4.1 3.8
Small Banks
SBL n/a 0.0 1.4 2.0 3.3 2.9 6.5 6.7 3.2
PBL 0.0 6.1 1.6 1.3 2.5 3.2 2.0 1.7 2.3
ICB 6.5 5.5 26.8 5.9 4.0 2.3 3.3 7.3 7.7
CAL 5.0 1.1 0.3 1.2 2.6 3.4 2.6 4.2 2.5
Average Small
Banks 3.8 3.2 7.5 2.6 3.1 2.9 3.6 5.0 4.0
INDUSTRY 1.9 2.6 6.9 7.2 6.0 4.9 3.8 3.0
Source: Calculated from Audited Accounts of Banks'
165
4.5.3 Profitability
Profitability ratios measure the extent to which resources are been utilised to
enhance shareholder value. Two most widely used profitability ratios are return
on assets (ROA) and return on equity (ROE).
Table 4.16a: Return on Assets and Return on Equity 1989 1990 1990-95 1996-99 2000 2001 2002 2003 2004 2005
ROA -3.5 5.5 3.4 5.0 5.5 5.2 3.8 3.3 3.8 3.2
ROE -76.6 50.3 27.5 39.6 50.0 41.7 32.6 30.3 32.1 25.3
Source: Calculated from Audited Accounts of Banks'
4.5.3.1 Return on Assets (ROA)
ROA basically measures managerial efficiency. It shows management’s ability
at using banks’ resources to generate revenue. It is calculated as:
ROA = Profit After Tax x 100 Total Assets
Generally, a high ratio is an indication of efficient use of company’s assets and
vice versa in any given financial year. ROA in the banking industry improved
significantly from negative 3.5% in 1989 to 5.5% in 1990 and the average for
1990-1995 and 1996-1999 was 3.4% and 5% respectively. It peaked at 5.5% in
2000 and has been falling since to 3.2% by 2005.
4.5.3.2 Return on Equity (ROE)
ROE indicates how much was earned for each unit invested by the owners. It is
a relatively straightforward benchmark for investors to compare the company's
use of its equity against other investments. It is determined as:
ROE = Profit after Tax x 100 Total Shareholders’ Funds
166
ROE has followed a similar trend as that of ROA. In 1990 ROE was 50.3% and
averaged 27.5% in 1990-1995 and further to 39.6% in 1996-1999 from a
negative return of 76.6% in 1989. ROE has experienced a nosedive trend since
2000 from a peak of 50% to 25.3% by 2005.
The period 2000-2005 witnessed downward trend in profitability as seen in
falling ROA and ROE in the industry. The drop in profitability was partly due
to the following:
High operating cost of most banks mostly from infrastructural cost
(technology) and staff cost.
Falling interest rates in the economy. Reduction in bank lending rates from
an average of 47% in 2000 to 26% in 2005 and reduction in treasury bill
rates (91-day) from 42% in 2000 to 11.5% in 2005.
High non-performing assets due to macroeconomic instability particularly
high interest rates and depreciation of the cedi in the late 1990s leading to
high loan default.
Increasing competition due to new entrants especially from Nigeria leading
to shrinking margins.
Increase in asset base of banks from ¢12.0 trillion in 2004 to ¢36.8 trillion
in 2005.
Fig 4.15: Return on Assets (ROA) and Return on Equity (ROE)
-100.0-80.0-60.0-40.0-20.0
0.020.040.060.0
1989 1990 1990-95 1996-99 2000 2001 2002 2003 2004 2005
Period
%
ROA ROE
167
Analysis of profitability ratios for the various bank categories reveals
interesting developments (see table 4.16b and 4.16c). The data show that most
of the medium and small banks namely EBG, TTB, MBG, NIB, CAL, and PBL
are doing far better than the big banks in terms of ROA and ROE, with the
exception of SCB and BBG (the two foreign banks in the country). This
confirms the argument that profit performance is independent of bank size but
the adoption of appropriate strategy is the main determining factor of
performance as shown in the Balanced Scorecard below.
Fig 4.16: Balanced Scorecard
Financial Perspective
Customer Perspective
Internal Perspective
Learning & Growth Perspective
Enhance Brand
Product Attributes
Manage Relationship
Manage/improve Productivity
Innovate Processes
Customer Mgt
Processes
Strategic Competencies
Strategic Technologies
Right Work Environment
Generate Revenue
Operational Processes
Enhance Brand
168
Table 4.16b: ROA = PAT/Total Assets (%) Big Banks 1998 1999 2000 2001 2002 2003 2004 2005 Average GCB 3.2 5.0 6.1 4.4 3.8 1.8 2.9 2.2 3.7 SCB 7.4 4.9 3.7 4.7 4.3 4.7 4.4 4.5 4.8 BBG 4.0 5.1 7.4 7.4 6.0 5.6 5.5 5.5 5.8 SG-SSB 4.8 5.3 6.3 6.7 4.2 4.2 4.4 3.2 4.9 ADB 5.0 5.6 7.8 7.2 3.5 2.6 3.6 2.2 4.7 Average Big Banks 4.9 5.2 6.3 6.1 4.4 3.8 4.2 3.5 4.8 Medium Banks MBG 7.0 3.9 2.5 3.7 1.5 1.6 4.2 3.3 3.5 EBG 4.7 3.5 4.0 5.0 3.6 3.6 3.8 3.7 4.0 TTB 4.9 3.2 4.0 3.7 2.7 3.1 4.1 4.6 3.8 NIB 2.6 4.6 15.4 4.8 3.8 3.2 3.5 3.1 5.1 Average Medium Banks 4.8 3.8 6.5 4.3 2.9 2.9 3.9 3.7 Small Banks SBL n/a (29.0) 2.0 1.6 1.1 2.0 1.6 1.9 -2.7 PBL 2.2 2.4 2.7 2.3 1.9 1.9 2.1 2.2 2.2 ICB 8.5 4.4 4.5 3.9 2.7 2.1 2.3 2.0 3.8 CAL 4.8 4.5 6.7 3.3 4.5 3.7 4.2 2.7 4.3 Average Small Banks 5.2 (4.4) 4.0 2.8 2.5 2.4 2.6 2.2 2.1 INDUSTRY 4.9 4.7 5.5 5.2 3.8 3.3 3.8 3.2 Table 4.16c: ROE = PAT/Equity (%) Big Banks 1998 1999 2000 2001 2002 2003 2004 2005 Average GCB 24.3 43.7 61.0 51.0 39.9 19.8 27.4 17.8 35.6 SCB 77.0 62.7 60.2 52.2 46.9 44.0 43.5 35.8 52.8 BBG 44.8 59.1 86.9 82.1 53.9 54.8 51.8 50.2 60.4 SG-SSB 32.8 32.7 45.8 41.6 27.6 26.9 28.8 23.4 32.4 ADB 24.2 27.6 43.0 32.0 16.7 17.0 19.7 12.1 24.0 Average Big Banks 40.6 45.2 59.4 51.8 37.0 32.5 34.2 27.8 Medium Banks MBG 36.6 35.8 15.3 24.2 12.3 16.2 32.0 24.4 24.6 EBG 40.3 43.8 30.6 28.2 41.2 43.7 43.5 43.2 39.3 TTB 27.6 24.5 45.3 39.8 34.3 40.9 52.0 44.9 38.6 NIB 14.6 24.4 55.9 15.7 19.0 25.0 30.3 25.8 26.3 Av. Medium Banks 29.8 32.1 36.8 27.0 26.7 31.5 39.4 34.6 Small Banks SBL n/a (36.1) 8.4 10.1 14.4 10.2 12.9 14.6 4.9 PBL 33.1 29.3 40.8 40.3 35.9 39.5 37.6 35.6 36.5 ICB 17.8 10.1 14.5 16.0 14.3 21.3 11.7 12.4 14.8 CAL 20.4 28.2 45.1 22.4 32.8 29.0 21.0 14.6 26.7 Av. Small Banks 23.8 7.9 27.2 22.2 24.4 25.0 20.8 19.3 21.3 INDUSTRY 36.0 39.5 50.0 41.7 32.6 30.3 32.1 25.3
Source: Calculated from Audited Accounts of Banks'
169
4.5.4 Cost Efficiency
The transaction costs ratio calculated as, Total Operating Costs over Total
Operating Income measures cost efficiency in the banking industry. The
transaction costs ratio shows the amount of resources spent to generate a unit of
income. Cost efficiency ratio fell from 59.4% in 1989 to 37% - 39% in the
1990s and has averaged 47% in the 2000s. Table 4.17a shows that transaction
cost ratio in the banking industry has been rising since 2001. This can be
interpreted to mean dwindling efficiency in the operation of banks. The ratio
has risen from 36% in 2000 to 59.1% in 2005 mainly due to rising operating
cost of banks particularly technology and staff cost and dwindling income due
to falling interest rates and competition in the industry.
Table 4.17a: Total Operating Cost/Total Operating Income
1989 1990 1990-
95 1996-
99 2000 2001 2002 2003 2004 2005 Total Operating Cost/ Total Op. Income 59.4 43.2 36.7 38.7 35.5 38.7 46.2 49.5 50.9 59.1 Source : Calculated from Audited Accounts of Banks'
Fig 4.17: Cost Efficiency
0.010.020.030.040.050.060.070.0
1989 1990 1990-95 1996-99 2000 2001 2002 2003 2004 2005
Period
%
170
BBG stands tall as the most efficient bank using the cost efficiency measure
with a ratio averaging 41.2% between 1998-2005, followed by MBG (41.6%),
EBG (42.6%), and SCB (43.3%). This explains why these are among the best
profitable banks in the industry. GCB, NIB, PBL, SG-SSB, and ADB seem to
be performing badly in terms of cost efficient with a ratio of 76.9%, 76%,
67.8%, 64.9%, and 63.6% respectively in 2005 (table 4.17b refers). The
average for SBL is exceptionally high because it begun operations in 1999 and
made a substantial loss in that year. Notwithstanding, the small banks seem to
be less efficient in terms of cost management.
Table 4.17b: Cost Efficiency = Tot. Op. Exp/Tot. Op. Income (%) Big Banks 1998 1999 2000 2001 2002 2003 2004 2005 Average GCB 59.4 43.1 30.4 30.5 42.0 57.4 63.8 76.9 50.4 SCB 34.1 36.4 38.7 43.4 50.3 49.2 48.3 46.0 43.3 BBG 60.2 47.7 32.1 32.6 37.5 39.5 37.8 41.9 41.2 SG-SSB 38.1 44.2 39.2 33.8 41.9 51.9 56.5 64.9 46.3 ADB 51.8 47.8 37.8 37.9 45.2 44.5 47.8 63.6 47.0 Average Big Banks 48.7 43.9 35.6 35.6 43.4 48.5 50.8 58.7 45.7 Medium Banks MBG 36.2 35.8 30.5 48.3 48.6 46.4 38.9 48.2 41.6 EBG 36.8 41.9 35.2 43.7 44.7 44.3 46.4 48.2 42.6 TTB 55.8 59.9 47.2 57.2 61.9 50.5 46.4 48.6 53.4 NIB 67.6 48.0 23.3 56.8 57.7 46.8 50.3 76.0 53.3 Av. Medium Banks 49.1 46.4 34.1 51.5 53.2 47.0 45.5 55.2 Small Banks SBL n/a 973.6 87.9 87.3 83.9 66.2 63.3 57.5 202.8 PBL 77.2 73.5 66.5 64.1 64.7 68.1 65.7 67.8 68.5 ICB 38.0 48.2 46.3 59.0 61.0 65.6 59.0 53.8 53.9 CAL 54.9 47.4 42.0 56.6 50.3 47.3 48.1 53.4 50.0 Av. Small Banks 56.7 285.7 60.7 66.8 65.0 61.8 59.0 58.1 89.2 INDUSTRY 47.4 44.4 35.5 38.7 46.2 49.5 50.9 59.1
Source: Calculated from Audited Accounts of Banks'
The above analyses show that the banking system in Ghana is well-capitalised,
profitable, liquid, sound and stable but less efficient. This implies that there is
capacity for improvement and expansion in the banking industry.
171
CHAPTER FIVE
5.0 FINDINGS, CONCLUSIONS AND RECOMMENDATION
5.1 FINDINGS
Our findings are as follows:
The market concentration of the top six major banks in Ghana points to
oligopolistic competition and that the reforms in the financial sector
have not been able to generate enough competition in the banking
industry in Ghana. This means that the new entrants have not been able
to penetrate into the top. The banking industry has enough opportunities
for growth and expansion as evidenced by the performance of Ecobank
Ghana Limited.
There is zero sum game among the top four banks (GCB, SCB, BBG
and SG-SSB) in the sense that the while the biggest bank (GCB) had
lost its market share of 53% as at 1988 (19.2% in 2005), the other three
banks SCB, BBG and SG-SSB had gained.
The only bank that has found its way among the top after liberalization
is Ecobank. The small banks are less competitive in terms of market
share and profitability due to their small capital base.
There is evidence of leadership-followership tendencies among banks in
Ghana in the area of pricing as evidenced by much wider interest rate
spread. The wide spread is attributed to high transaction cost. For
example, GCB the biggest bank in Ghana had a cost/income ratio of
78% in 2005. The industry cost/income ratio is now more than 60%,
indicating inefficiencies in the banking industry.
172
PR/H-Statistic seems to suggest monopolistic competition and H-
Statistic for Ghana banking industry is far lower than other comparable
African countries.
Spearman’s Rank Correlation Coefficient Matrix seems to suggest that
concentration and profitability are not statistically related in the banking
industry in Ghana.
Regression results seem to suggest that bank size and performance are
statistically insignificant. This means that size does not matter in terms
of profit and that what matters is equity (tier one capital i.e.
shareholders funds).
Another inference is that foreign-owned banks (BBG, SCB and
Ecobank) are more profitable than the locally-owned banks (GCB,
ADB, NIB and MBG). Also, medium and small banks are more
profitable than big banks with the exception of BBG, SCB and
Ecobank.
The improvement in the quality of the loan portfolio was largely due to
the expansion in the credit base of the banking industry as a result of
reduction in reserve requirement.
Staff Cost and infrastructural cost (technology) are the main sources of
high operating costs.
173
5.2 Conclusion
The main conclusion of this paper which follows the same conclusion of Buchs
and Mathisen (2005) is that banks in Ghana appear to behave in a non-
competitive manner that could hamper financial intermediation. High
Profitability of banks in Ghana due to the wider interest rate spread account for
this uncompetitive behaviour of banks. Two other key conclusions from this
research are:
The assertion that concentration results in monopoly profit cannot be
confirmed by empirical evidence in Ghana; and
Bank size in terms of assets growth and profit performance are
statistically insignificant at 5% level of significant and that size does not
matter in profit performance. It is rather growth in equity which matter
for profit performance. The results of this research underline the utmost
importance of bank soundness rather than asset size, for sustainable
bank performance. The results clearly confirm the relevance of
individual bank characteristics for profit growth.
5.3 Policy Recommendation
Based on above findings and conclusions we recommend the following as a
policy for banks’ strategic direction:
The need to sustain and deepen the current government fiscal prudence
so as to bring down interest rates and reduce banks’ spread in Ghana.
The need to reduce the transaction cost (particularly staff cost and
investment cost-telecommunication).
174
Addressing the occurrence of losses on the loan portfolio particularly in
the local banks
The regression results clearly confirm the relevance of individual bank
characteristics for profit growth which is size of bank’s tier-one capital.
Bank size is irrelevant for profit growth as per Ghana Commercial Bank
profit performance. Appropriate strategy is the key determining factor
of profitability.
The SWOT analysis in the banking industry in Ghana seems to indicate
that foreign-owned banks are technologically advanced, more efficient
and profitable than locally-owned banks. Macroeconomic stability is
essential for the development of the banking industry in general but
more important to the individual banks is the improvement in their
credit risk and operational risk management. This is a key lesson for
banks particularly, locally owned banks.
Encouraging the development of compatible IT infrastructure so that
banks can pool resources and lower technological cost in the industry to
enhance efficiency.
There is the need for promotion and development of savings culture.
This calls the introduction of innovative and attractive products and
stepping up savings mobilisation drive as well as ensuring confidence
and credibility in the banking system to attract prospective depositors.
Ensuring sustainable growth of the economy and the private sector in
particular to boost income levels as well as savings and investment.
There is the need for progressive reduction in reserve requirements,
tariffs and charges and lending rates as macroeconomic stability is
175
entrenched to reduce the cost of banking services and increase
competition.
There is the need for consolidation and mergers particularly among the
small banks to expand their capital base in order to make them stronger
and competitive.
176
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Appendices
Appendix 1 : Macroeconomic Variables Rate of Inflation Change in Real Real Rate of
(% pa) Exchange Rate (% pa) Interest (% pa)
1980-89 1990-95 1980-89 1990-95 1980-89 1990-95
Cameroon 8.8 6.8 1.1 (2.2) 0.0 3.4
Ghana 36.7 24.8 (3.5) (1.6) (17.6) 7.8
Kenya 11.0 20.4 (2.7) 3.6 2.3 4.9
Mauritius 10.1 7.8 (2.3) 4.1 2.9 3.3
Zambia 30.8 71.7 (1.4) 1.4 (10.5) (47.6)
Zimbabwe 11.9 22.9 (3.0) (2.1) (3.4) 1.6
Source : Teal (March 1999)
Appendix 2: Sectoral Percentage Contribution to Overall Growth (1995-2005) Sector 1995 1997 1999 2000 2002 2003 2004 2005
Agriculture 36.3 36.6 36.5 36.0 34.4 41.4 46.7 41.4
Industry 24.9 25.4 25.2 25.2 25.9 24.0 22.1 23.9
Service 28.1 28.7 29.2 28.1 31.0 26.7 24.3 27.7
Source: 2006 Budget Statement, The State of the Ghanaian Economy in 2000
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Appendix 3: Key Macroeconomic Indicators 1983-2005 Year Growth in Interest Exchange Inflation Depreciation
Real GDP Rate Rate (¢/$) (Annual Av.) of the Cedi
1983 0.7 18.0 3.5 122.8 20.0
1984 2.6 18.5 35.3 39.7 90.1
1985 5.1 20.5 54.1 10.3 34.8
1986 5.2 23.5 89.3 25.6 39.4
1987 4.8 26.0 147.1 39.8 39.3
1988 6.2 26.0 200.0 31.4 26.5
1989 5.1 26.0 270.3 25.2 26.0
1990 3.3 25.3 326.3 37.2 17.2
1991 5.3 30.5 367.8 18.0 11.3
1992 3.9 24.0 437.1 10.1 15.9
1993 5.3 35.0 649.1 25.0 32.7
1994 3.8 30.0 956.7 24.9 32.2
1995 4.5 41.5 1,446.10 58.50 33.8
1996 5.2 42.8 1,740.40 46.60 16.9
1997 5.1 42.5 2,250.00 27.90 22.6
1998 3.7 26.8 2,346.00 15.20 4.1
1999 4.4 31.5 3,500.70 12.40 33.0
2000 3.7 38.8 6,889.30 25.20 49.2
2001 4.2 27.0 7,255.20 32.90 5.0
2002 4.5 24.8 7,932.30 14.80 8.5
2003 5.2 18.1 8,697.50 26.70 8.8
2004 5.8 16.4 9,004.60 12.60 3.4
2005 5.8 11.5 9,088.18 15.10 0.9
Sources : 2006 Budget Statement
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Appendix 4: Date of Establishment and Nature of Business of Banks
INITIALS BANK DATE OF ESTABLISHMENT
NATURE OF BUSINESS
GCB Ghana Commercial Bank 1952 Universal Bank BBG Barclays Bank Ghana 1918 Universal Bank SCB Standard Chartered Bank June,1896 Universal Bank SG-SSB ADB
SG-SSB Bank Limited Agricultural Development Bank
1976 1965
Universal Bank Development Bank
TTB The Trust Bank 1994 Commercial Bank NIB National Investment Bank 1963 Development Bank MBG Merchant Bank Ghana
Limited March,1972 Universal Bank
EBG Ecobank Ghana Limited April,1990 Universal Bank CAL CAL Merchant Bank 1991 Merchant Bank FAMBL First Atlantic Bank 1995 Merchant Bank ABL HFC
Amalgamated Bank HFC Bank Limited
2000 2002
Merchant Bank Universal Bank
PBL Prudential Bank Limited 1997 Commercial Bank MAB Metropolitan & Allied Bank 1995 Commercial Bank STB Zenith GTB INTER
Standard Trust Bank Zenith Bank Guaranty Trust Bank Intercontinental Bank Plc
2005 2005 2006 2006
Universal Bank Universal Bank Universal Bank Universal Bank
ICB International Commercial Bank
1996 Commercial Bank
UNI Unibank Ghana Limited 1999 Commercial Bank SBL Stabic Bank Ghana Limited 2000 Commercial Bank
BIG BANKS MEDIUM-SIZED SMALL BANKS